s 


t. 


HG 


UC-NRLF 


$B    37    bflS 


eXCHANC^E 

^^  Y  4M927 

UNn  ERSITY  OF  PENNSYLVANIA 


THE  FEDERAL  RESERVE  CHECK 
COLLECTION  SYSTEM 


GORDON  B.  ANDERSON 


A  THESIS 

IN    FINANCE 

PRESENTEr   TO  THL  FACULTY  OF  THE  GRADUATE  J,CnOOL  IN 

PARTIAl.  FULl-TLLMENT  v.F  THE  REQUIREMENTS    /OR 

THE  DECREE   OF  DOCTOR  OF   PHILOSOPHY 


OvJ 

o 


PHILADELPHIA 
1917 


THE  FEDERAL  RESERVE  GHEGK 
COLLECTION  SYSTEM 


A  THESIS 

IN    FINANCE 

PRESENTED  TO  THE  FACULTY  OF  THE  GRADUATE  SCHOOL  OF  THE 

UNIVERSITY  OF  PENNSYLVANIA  IN  PARTIAL  FULFILLMENT 

OF  THE  REQUIREMENTS  FOR  THE  DEGREE 

OF  DOCTOR  OF  PHILOSOPHY 


GORDON  B.  ANDERSON 


PHILADELPHIA 
1917 


EXCHANGE 


THE  FEDERAL  RESERVE  CHECK  COLLECTION 
SYSTEM 

In  framing  the  Federal  Reserve  Act  considerable  attention 
was  directed  to  the  subject  of  collecting  out-of-town  checks. 
Sections  13  and  16  of  the  Federal  Reserve  Act  referring  to  the 
clearing  and  collection  functions  of  the  Federal  Reserve  Banks 
provide  as  follows: 

"Section  13. — .  .  .  Any  Federal  Reserve  Bank  may  receive  from  any  of  its 
member  banks,  and  from  the  United  States,  deposits  of  current  funds  in  law- 
ful money,  national-bank  notes,  Federal  Reserve  notes,  or  checks,  and  drafts 
payable  upon  presentation,  and  also,  for  collection,  maturing  bills;  or  solely 
for  the  purposes  of  exchange  or  of  collection,  may  receive  from  other  Federal 
Reserve  Banks  deposits  of  current  funds  in  lawful  money,  national-bank  notes, 
or  checks  upon  other  Federal  Reserve  Banks,  and  checks  and  drafts,  payable 
upon  presentation  within  its  district,  and  maturing  bills  payable  within  its 
district." 

"Section  16. — .  .  .  Every  Federal  Reserve  Bank  shall  receive  on  deposit  at 
par  from  member  banks  or  from  Federal  Reserve  Banks  checks  and  drafts 
drawn  upon  any  of  its  depositors,  and  when  remitted  by  a  Federal  Reserve 
Bank,  checks  and  drafts  drawn  by  any  depositor  in  any  other  Federal  Reserve 
Bank  or  member  bank  upon  funds  to  the  credit  of  said  depositor  in  said 
reserve  bank  or  member  bank.  Nothing  herein  contained  shall  be  construed 
as  probibiting  a  member  bank  from  charging  its  actual  expense  incurred  in 
collecting  and  remitting  funds,  or  for  exchange  sold  to  its  patrons.  The 
Federal  Reserve  Board  shall,  by  rule,  fix  the  charges  to  be  collected  by  the 
member  banks  from  its  patrons  whose  checks  are  cleared  through  the  Federal 
Reserve  Bank,  and  the  charge  which  may  be  imposed  for  the  service  of  clear- 
ing or  collection  rendered  by  the  Federal  Reserve  Bank. 

"The  Federal  Reserve  Board  shall  make  and  promulgate  from  time  to 
time  regulations  governing  the  transfer  of  funds  and  charges  therefor  among 
Federal  Reserve  Banks  and  their  branches,  and  may  at  its  discretion  exercise 
the  functions  of  a  clearing  house  for  such  Federal  Reserve  Banks,  or  may 
designate  a  Federal  Reserve  Bank  to  exercise  the  functions  of  a  clearing  house 
for  its  member  Banks." 

The  Federal  Reserve  Act,  as  originally  passed,  did  not  provide 


628945 


4^'\  \  :/'  :^iHE: FED^EBAt  RESERVE  CHECK  COLLECTION  SYSTEM 

a  technically  adequate  system  for  the  collection  of  checks,  with 
the  result  that  the  Federal  Reserve  Board  recommended  to 
Congress  an  amendment  recasting  the  phraseology  of  Section 
13,  which  was  adopted  in  August  1916.  The  wording  above  is 
that  of  the  law  as  then  amended.  The  greatest  change  effected 
by  the  amendment  was  the  elimination  of  the  requirement 
that  only  checks  and  drafts  upon  "solvent  member  banks" 
might  be  deposited  with  a  Federal  reserve  bank.  It  was  mani- 
festly impossible  at  the  time  a  check  was  received  by  a  Federal 
Reserve  Bank  to  be  certain  that  it  was  drawn  upon  a  solvent 
bank.  The  Federal  Reserve  Bank,  moreover,  was  protected 
against  loss  by  the  depositing  member  bank's  endorsement  on 
each  check. 

In  addition,  the  revision  in  phraseology  made  certain  that  the 
Federal  Reserve  Banks  could  receive  from  member  banks'  de- 
posits consisting  in  whole  or  in  part  of  checks  drawn  upon  non- 
member  state  banks.  This  greatly  increased  the  value  of 
the  collection  system  to  the  member  banks,  particularly  when 
the  majority  in  number  of  state  banks  remain  outside  of  the 
system.  There  were  on  March  5,  1917,  7581  national  banks, 
all  of  which  are  members  of  the  Federal  Reserve  System,  and 
over  20,000  state  banks,  of  which  only  40  were  members.  Since 
approximately  one-half  of  the  checks  received  by  the  member 
banks  are  drawn  upon  non-member  state  banks,  it  became 
necessary  to  make  some  provision  for  collection  of  such  items. 

Collections  Under  the  National  Bank  Act. — Under  the  National 
Bank  Act  national  banks  were  divided  into  three  groups,  first, 
the  national  banks  in  New  York,  Chicago  and  St.  Louis, 
designated  as  central  reserve  cities;  second,  national  banks 
in  fifty -two  cities,  known  as  reserve  cities;  third,  national  banks 
situated  in  other  places,  known  as  country  banks.  The  purpose 
of  this  classification  was  primarily  to  bring  about  a  certain 
degree  of  concentration  of  banking  reserves.  The  central 
reserve  and  reserve  city  banks  as  reserve  agents,  carried  a 
portion  of  the  reserve,  known  as  the  "deposited  reserve", 
of  other  banks,  commonly  termed  correspondents.  The 
deposited  reserve  is  built  up  almost  entirely  through  the 
deposit  of  checks  which   are   sent  by    the  correspondents   to 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  5 

their  reserve  agents  for  collection  and  credit.  It  was  the 
common  practice  to  credit  these  checks  to  the  correspondent's 
account  immediately  upon  receipt  whether  or  not  the  reserve 
agent  was  able  to  collect  them  at  once.  Sometimes  a  week  or 
more  was  necessary  for  the  actual  collection  of  a  check.  The 
aggregate  of  these  uncollected  checks  was  known  as  "the  float." 

Under  the  national  banking  system  this  "float"  was  of  large 
proportions,  and  was  necessarily  increased  by  the  indirect 
routing  of  checks  and  the  delay  in  remittances.  In  a  great  many 
cases  the  same  checks  served  as  a  reserve,  not  only  for  the  country 
bank,  but  for  the  reserve  city  bank,  inasmuch  as  the  latter  would 
in  turn,  send  them  to  central  reserve  city  banks  for  deposit 
and  collection.  The  country  bank  upon  mailing  the  checks 
would  immediately  count  them  as  part  pf  its  deposited  reserve. 
The  checks  would  not  be  received  by  the  reserve  city  bank  for  a 
day  or  more,  and  then  the  reserve  city  bank  would  forward  the 
checks  to  a  central  reserve  city  bank  for  collection,  counting 
this  deposit  as  part  of  its  own  reserve.  The  reserve  agents  gave 
the  correspondent  banks  immediate  credit  for  these  items, 
sometimes  charging  them  exchange  for  the  collection  service 
rendered,  and  on  other  occasions  levying  an  indirect  charge  by 
deferring  interest  until  the  funds  were  actually  in  hand. 

Although  correspondent  banks  received  immediate  credit  for 
checks,  which  they  deposited  with  their  reserve  agents,  on 
the  other  hand,  the  reserve  agent  receiving  checks  drawn  upon 
its  correspondents  seldom  charged  these  items  immediately 
against  their  accounts,  but  sent  them  home  for  collection  and 
allowed  the  correspondent  bank  sufficient  time  to  remit.  Fre- 
quently the  country  bank  would  charge  the  reserve  agent  ex- 
change for  the  checks  presented  on  their  accounts,  this  charge 
presumably  covering  the  cost  of  the  service  rendered  in  honoring 
the  checks  and  remitting  by  draft.  Where  the  reserve  agent 
received  checks  drawn  upon  banks  which  were  not  included 
among  its  list  of  correspondents,  the  common  practice  was  to 
collect  these  checks  in  one  of  two  ways;  first,  to  send  such 
checks  to  one  of  its  correspondents  situated  in  the  same  town 
or  in  a  nearby  community ;  second,  to  send  the  checks  to  a  cor- 
respondent situated  at  some  point  geographically  near  the  bank 


6  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

on  which  the  check  was  drawn,  which  correspondent  had  indi- 
cated on  its  so-called  "par  list"  that  it  would  take  checks  drawn 
on  banks  at  their  face  value  in  that  town.  This  roundabout 
method  of  collection  increased  the  delay  incident  to  the  collec- 
tion of  checks  and  consequently  exaggerated  the  size  of  the 
"float."  It  has  been  estimated  that  from  one-third  to  one-half 
of  the  deposited  reserve  with  reserve  agents,  really  consisted 
of  checks  which  were  at  the  moment  in  the  process  of  collection. 

It  is  obvious  that  uncollected  checks  do  not  constitute  a 
legitimate  bank  reserve.  One  of  the  purposes  of  the  Federal 
Reserve  Act  is  to  eliminate  fictitious  reserves  of  this  character, 
and  to  substitute  a  tangible  reserve  that  will  be  available  when 
necessary.  The  reduction  in  the  reserve  requirements  of  mem- 
ber banks,  therefore,  has  really  been  less  than  would  appear 
by  a  comparison  of  the  percentages,  for  it  will  to  a  large  degree, 
be  offset  by  the  elimination  of  the  "float",  or  the  fictitious 
portion  of  the  deposited  reserve  under  the  old  system. 

Inauguration  of  the  Federal  Reserve  Collection  System. — ^The 
keystone  of  the  Federal  reserve  system  is  the  twelve 
Federal  reserve  banks,  in  whose  hands  will  be  centered  the 
greater  part  of  the  reserves  of  the  banks  joining  the  system, 
known  as  member  banks.  The  elimination  of  the  old  reserve 
agents  is  to  be  brought  about  gradually  over  a  period  of  three 
years  terminating  in  November  1917.  Up  to  this  time  the  mem- 
ber banks — comprising  all  the  national  banks  and  about  forty 
out  of  the  twenty  thousand  state  banks — have  been  living  under 
an  anomalous  arrangement,  by  which  most  of  them  are  carrying 
their  reserves  in  three  places — in  their  own  vaults,  on  deposit 
with  the  old  reserve  agents  and  on  deposit  with  the  Federal 
reserve  banks.  On  and  after  November  16,  1917  (or  earlier  if  an 
amendment  recommended  by  the  Federal  Reserve  Board  is 
adopted)  member  banks  can  carry  their  reserves  in  only  two 
places — in  their  vaults  or  on  deposit  with  the  Federal  reserve 
banks.  Thus  the  old  reserve  agents  will  be  eliminated.  It  was 
obvious  to  the  framers  of  the  Act  that  with  the  elimination  of 
the  old  reserve  agents  must  come  the  creation  of  facilities  which 
would  perform  the  service  heretofore  rendered  by  such  agents 
for   the   correspondent  banks.     The   most   important  of  these 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  7 

services  is  the  collection  of  out-of-town  checks,  frequently- 
referred  to  as  "foreign  items." 

The  Voluntary  Clearing  System. — On  May  15,  1915,  the  Federal 
reserve  banks  instituted  a  voluntary  intra-district  clearing 
system,  which  provided  that  the  Federal  reserve  banks  would 
charge  immediately  on  receipt  against  the  assenting  member 
bank's  account,  subject  to  payment  by  such  member  bank, 
checks  and  drafts,  payable  upon  presentation,  deposited  by 
other  banks  which  had  joined  the  system.  Checks  would  be 
charged  only  against  the  accounts  of  those  member  banks 
which  had  assented  to  such  action,  from  whence  came  the  term 
"voluntary  clearing  system."  Under  this  system  each  member 
bank  had  to  provide  sufficient  funds  to  offset  the  items  charged 
against  its  account.  The  portion  of  the  reserve  of  the  member 
bank,  which  the  law  required  to  be  kept  with  the  Federal  reserve 
bank,  was  not  to  be  impaired  and  whatever  additional  amount 
had  to  be  kept  on  deposit  to  avoid  such  impairment,  was  to  be 
determined  by  experience.  Checks  and  drafts  payable  on  pres- 
entation, drawn  on  any  member  bank  in  the  district  which  had 
joined  the  collection  system,  were,  subject  to  final  payment, 
received  for  immediate  credit  to  the  depositing  bank's  account. 

This  plan  is  known  as  the  reciprocal  plan  of  immediate  clear- 
ance. Each  Federal  reserve  bank  worked  out  its  own  method, 
based  on  the  same  general  principle.  At  first  it  was  purely 
an  intra-district  clearing  plan,  based  on  the  principle  of  imme- 
diate debit  and  credit  of  items  remitted  to  the  bank  for  collec- 
tion. Under  this  plan  the  member  banks  found  it  very  difficult 
to  gauge  the  excess  balance,  which  they  had  to  keep  on  deposit 
with  the  Federal  reserve  bank  to  cover  items  drawn  on  them. 
The  Federal  reserve  banks,  especially  in  the  early  stages  of  the 
system,  had  to  be  very  lenient  in  the  matter  of  deficiencies  in 
reserves. 

Comparatively  few  member  banks  took  advantage  of  clearing 
their  checks  through  the  Federal  reserve  banks  under  the  vol- 
untary system.  However,  the  large  city  banks  cleared  checks 
drawn  on  assenting  banks  with  which  they  did  not  correspond, 
and  in  this  way  were  able  to  dispose  of  some  of  their  items  more 
cheaply  than  under  the  old  system.    Despite  the  fact  that  the 


8  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

Federal  reserve  banks  absorbed  all  the  costs  involved,  the  vol- 
untary plan  of  check  collection  was  not  a  success.  The  member 
banks  were  still  operating  under  a  dual  system  of  reserves.  The 
reserve  balances  which  the  country  banks  carried  with  their  old 
reserve  agents  still  compensated  the  latter  for  the  collection 
service  rendered.  Comparatively  few  banks  agreed  to  the  terms 
of  the  voluntary  system,  and  the  provision  of  the  law  since 
changed,  which  provided  that  only  items  on  members  of  the 
clearing  system  could  be  handled,  limited  its  usefulness.  The 
need  of  including  outside  checks  within  the  scope  of  operations, 
was  obvious.  Again,  the  bankers  felt  that  the  Federal  reserve 
banks  ought  to  assume  the  "float,"  but  this,  the  Federal  Reserve 
Board  refused  to  sanction;  pointing  out  that  this  would  per- 
petuate the  unsatisfactory  procedure  of  making  a  large  part  of 
the  deposits  of  the  Federal  reserve  banks,  float. 

The  serious  inroads  that  would  be  made  upon  the  deposits  of 
the  Federal  reserve  banks  if  they  assumed  the  "float,"  can 
readily  be  demonstrated  by  an  example.  In  the  month  from 
March  16,  to  April  15,  1917,  the  average  daily  collections 
passing  through  the  twelve  Federal  reserve  banks,  consisted  of 
231,800  items,  aggregating  $127,648,500.  Of  this  $67,360,500, 
or  52.7  per  cent  required  from  two  to  nine  days  for  collection. 
Presuming,  for  the  sake  of  illustration,  that  the  average  time 
of  collection  was  three  days,  the  "float"  would,  therefore,  be  in 
excess  of  $200,000,000.  The  maximum  deposits  of  the  member 
banks  with  the  Federal  reserve  banks  reported  in  this  period 
was  $758,219,000. 

Inauguration  of  the  Compulsory  Collection  System. — ^After 
the  Federal  reserve  banks  had  operated  the  voluntary  system 
of  clearing  for  a  year  the  Federal  Reserve  Board  inaugurated 
the  compulsory  plan,  which  was  put  into  operation  July  15,  1916. 
In  a  statement  to  the  press  the  salient  features  of  the  plan  were 
stated  as  follows : 


"  (1)  The  Federal  Reserve  Banks  will  accept  at  par  all  checks  from  mem- 
ber banks,  whether  drawn  against  other  member  banks,  non-member  banks, 
or  private  banks.  An  exception  is  made  at  the  outset  in  the  case  of  checks 
drawn  against  non-member  banks  which  can  not  be  collected  at  par. 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  9 

"(2)  All  checks  thus  received  from  member  banks  will  be  given  imme- 
diate credit  entry,  although  amounts  thus  credited  will  not  be  counted  as 
reserves  nor  become  available  until  collected. 

"  (3)  In  order  to  enable  member  banks  to  know  how  soon  checks  sent  in  for 
collection  will  be  available  either  as  reserves  or  for  payment  of  checks  drawn 
against  them,  time  schedules,  giving  the  minimum  time  for  collection,  will 
be  furnished  by  each  Federal  Reserve  Bank  to  its  member  banks. 

"  (4)  The  actual  cost,  without  profit,  of  the  clearing  and  collection  of  checks 
will  be  paid  by  the  Federal  Reserve  Banks  and  assessed  against  the  member 
banks  in  proprotion  to  their  sendings. 

"  (5)  The  whole  plan  is  based  on  generally  accepted  principles  under  which 
clearing  and  collection  plans  have  long  been  operated.  A  Federal  Reserve 
Bank  will  not  debit  a  member  bank's  reserve  account  with  items  forwarded 
to  it  for  collection  until  the  remittance  of  the  member  bank  in  payment  of 
such  items,  shall  have  had  time  to  reach  the  Federal  Reserve  Bank." 

Under  this  system  member  banks  are  free  to  continue  accounts 
with  their  city  correspondents  and  in  fact,  none  of  the  old  col- 
lection machinery  need  be  disturbed.  The  collection  plan  is  not 
compulsory  upon  any  bank  so  far  as  the  use  of  facilities  to  be 
provided  is  concerned.  They  are  compelled,  however,  to  remit 
at  par  for  all  checks  presented  at  their  own  counters.  This 
includes  checks  sent  to  them  by  the  Federal  reserve  bank  directly 
through  the  mails.  Member  banks  can  remit  by  draft,  either 
on  the  reserve  bank  or  on  a  bank  acceptable  to  the  reserve 
bank,  or  in  cash.  In  case  cash  is  remitted,  that  is  to  say  lawful 
money  of  the  United  States  or  Federal  reserve  notes  (anything 
except  national  bank  notes),  the  Federal  reserve  bank  will  pay 
the  transportation  charges. 

For  member  banks  which  send  checks  to  the  Federal  reserve 
bank  for  collection,  a  small  service  charge  is  made.  This  charge 
is  based  on  a  flat  rate  per  item  and  varies  from  two  cents  per 
item,  the  charge  of  the  San  Francisco  Reserve  Bank  and  the 
maximum  charge  allowed  by  the  Federal  Reserve  Board,  to 
nine-tenths  of  one  cent  per  item,  the  charge  of  the  Boston 
Reserve  Bank.  Most  reserve  banks  have  fixed  the  service 
charge  at  1}^  cents  per  item.  Between  all  Federal  reserve 
banks  a  charge  of  IJ^  cents  per  item  is  made.  The  service 
charges   were   determined   after  a   canvass  of   the  experience 


W  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

of  the  old  reserve  agents.  If  later  experience  of  the  Federal 
reserve  banks  show  that  the  charges  are  too  high,  reductions 
will  doubtless  be  made.  Practically  all  of  the  reserve  banks 
are  at  present  collecting  checks  at  a  cost  considerably  below 
the  service  charge. 

Collection  Charges  and  Costs. — ^Some  people  have  misinter- 
preted this  service  charge  as  being  in  violation  of  the  provision 
of  the  Federal  Reserve  Act,  requiring  Federal  reserve  banks 
to  receive  checks  for  deposit  at  par.  As  a  matter  of  fact,  checks 
are  immediately  credited  at  par,  the  service  charge  being  cal- 
culated for  each  bank  at  the  end  of  the  month;  a  statement 
being  rendered  to  each  depositing  bank  of  the  charges  against 
it,  giving  the  number  of  checks  received  each  day  and  the  total 
for  the  month.  With  but  one  exception  the  two-cent  service 
charge  is  ample — ^but  in  case  of  district  twelve,  the  reserve  bank 
must  absorb  part  of  the  cost  of  the  collection  business.  The 
service  charge  imposed  per  item  and  the  cost  of  collection  for 
each  of  the  twelve  banks  during  the  period  from  July  15,  1916, 
to  December  31,  1916,  are  shown  on  page  11. 

The  law  did  not  contemplate  that  the  collection  service 
should  be  done  gratis,  either  on  the  part  of  the  member  bank 
for  its  customers  or  by  the  Federal  Reserve  Bank.  The  law 
specifically  gives  the  Board  power  to  regulate  charges  in  both 
instances,  but  on  the  other  hand  clearly  indicates  that  the 
charge  shall  represent  the  cost  only — the  item  of  profit  being 
eliminated.  So  far,  the  Board  has  not  seen  fit  to  regulate  the 
charges  made  by  member  banks  to  their  depositors. 

The  transit  departments  of  all  Federal  reserve  banks  are 
substantially  similar,  closely  resembling  the  transit  departments 
of  the  larger  city  banks.  In  fact,  the  Federal  reserve  banks  when 
installing  their  transit  departments  had  the  advantage  of  the 
co-operation  of  the  city  banks.  In  the  case  of  Boston,  the 
Federal  reserve  bank  took  over  in  its  entirety  the  staff  and 
quarters  of  the  Boston  Clearing  House.  In  practically  every 
other  case  the  Federal  reserve  transit  departments  number 
among  their  clerical  force  experienced  transit  men,  coming  from 
the  banks  in  the  city  in  which  the  reserve  bank  is  located.  The 
plan  of  organization  and  the  methods  employed  in  the  collection 


8gi 

>     P4     HH 


P^  B  tn 

H    t3   H 
8g« 


«  Q 

?  «  W 

Ph  S  J 

u.  W  Q 


55  H  *^  H 


en 
H 

o  w 

H 
O 
H 


«  in  Q 
1^  a  H 


ie 


^sa 


CO\0>0»OCN»OiOtO»o»0»00 

0)    • 


C300t^O\'-tO»-HO>0'«-HO\p<)00 

OJ 


vO '»-H^  CS^  ro  ro  >0  Ov^ «  O^  C^l^  T^  »0 

o  »o  tjT  frj"  T-TtC  \o  ^t>r  »o  oT  ocT 


iO< 


Ot^t^OOO 


00"^ 

O00( 


00  t^ 


rt«  O  »o  ^  t^  t^  es 


OCf  tjT  NO  vo  tjT  T^tC 
VO  CN  10  CS  10  a^  00 
CO  O  t--  00  '-t  ■^  cs 


■^  os  00  a\  «o  00 1^ 

On  0\  O  CS  tJ*  t^  VO 
t1<  10  o  fO  00  CO  1-1 


Tj<t^t^CN\00\t^OON0CSt>- 

*^  ^«  ^ 'I  ®>  ®  °9.  ^  "*.  °^  ^  "^ 

t^  00  o  \o  o"  <N  vO  TiT  oT  ri  10  rlT 
rt<OOONCNOOOcocsvOO\0 
OOOn'OOnOOiocsioio-**'"^ 

^  TiT  CO  th  es  ^  cs  cs  T-T  ^  i-T 


O  ^  -G  ^  •«  -M  J3  4J  S  .^  i?  ctf 


12  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

departments  of  the  several  reserve  banks  do  not  vary  sufficiently 
to  necessitate  a  detailed  description  of  each.  The  collection 
department  of  the  Federal  Reserve  Bank  of  Philadelphia  is  used 
as  the  basis  of  this  study.  Important  variations  in  the  methods 
followed  by  the  other  reserve  banks  are  noted  wherever  they 
occur. 

Regulations  Governing  Collection  Service. — ^The  collection  activ- 
ities of  the  Federal  reserve  banks  are  now  being  conducted  under 
Federal  Reserve  Board  Regulation  J,  Series  1916,  which  reads 
as  follows: 

"The  Federal  Reserve  Board  is  empowered,  under  section  16,  of  the  Fed- 
eral Reserve  Act,  to  require  each  Federal  Reserve  Bank  to: 

" '  Exercise  the  function  of  a  clearing  house  for  its  member  banks.' 

"In  pursuance  of  the  authority  vested  in  it  under  the  provisions  of  this 
section,  the  Federal  Reserve  Board,  desiring  to  afford  to  both  the  public  and 
the  various  member  banks  a  direct,  expeditious,  and  economical  system  of 
check  collection  and  settlement  of  balances,  hereby  requires  all  Federal  Reserve 
Banks  to  exercise  the  functions  of  a  clearing  house  for  their  respective  mem- 
ber banks  under  the  following  general  terms  and  conditions: 

"Each  Federal  Reserve  Bank  will  receive  at  par  from  its  member  banks 
checks*  drawn  on  all  member  banks,  whether  in  its  own  district  or  other 
districts,  and  checks  drawn  upon  non-member  banks  when  such  checks  can  be 
collected  by  the  Federal  Reserve  Banks  at  par. 

"Each  Federal  Reserve  Bank  will  receive  at  par  from  other  Federal  Re- 
serve Banks  checks  drawn  upon  all  member  banks  of  its  district  and  upon 
all  non-member  banks  whose  checks  can  be  collected  at  par  by  the  Federal 
Reserve  Bank.  The  Federal  Reserve  Banks  will  prepare  a  par  list  of  all  non- 
member  banks,  to  be  revised  from  time  to  time,  which  will  be  furnished  to 
member  banks. 

"Immediate  credit  entry  upon  receipt  subject  to  final  payment  will  be 
made  for  all  such  items  upon  the  books  of  the  Federal  Reserve  Bank  at  full 
face  value,  but  the  proceeds  will  not  be  counted  as  part  of  the  minimum  reserve 
nor  become  available  to  meet  checks  drawn  until  actually  collected  in  accord- 
ance with  the  best  practice  now  prevailing. 


*  A  check  is  generally  defined  as  a  draft  or  order  upon  a  bank  or  banking 
house,  purporting  to  be  drawn  upon  a  deposit  of  funds,  for  the  payment  at  all 
events  of  a  certain  sum  of  money  to  a  certain  person  therein  named,  or  to  him 
or  his  order,  or  to  bearer,  and  payable  instantly  on  demand. 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  13 

"(2)  Checks  received  by  a  Federal  Reserve  Bank  on  its  member  banks 
will  be  forwarded  direct  to  such  member  banks  and  will  not  be  charged  to  their 
accounts  until  advice  of  payment  has  been  received  or  until  sufficient  time 
has  elapsed  within  which  to  receive  advice  of  payment. 

"(3)  In  the  selection  of  collecting  agents  for  handling  checks  on  non- 
member  banks  member  banks  will  be  given  the  preference. 

"(4)  Under  this  plan  Federal  Reserve  Banks  will  receive  at  par  from 
their  member  banks  checks  on  all  member  banks  and  on  non-member  banks 
whose  checks  can  be  collected  at  par  by  any  Federal  Reserve  Bank.  Member 
banks  will  be  required  by  the  Federal  Reserve  Board  to  provide  funds  to 
cover  at  par  all  checks  received  from  or  for  the  account  of  their  Federal  Reserve 
Banks:  Provided,  however,  That  a  member  bank  may  ship  lawful  money  or 
Federal  Reserve  notes  from  its  own  vaults  at  the  expense  of  its  Federal  Reserve 
Bank  to  cover  any  deficiency  which  may  arise  because  of  and  only  in  the  case 
of  inability  to  provide  items  to  offset  checks  received  from  or  for  the  account 
of  its  Federal  Reserve  Bank. 

"  (5)  Section  19  of  the  Federal  Reserve  Act  provides  that: 

'"The  reserve  carried  by  a  member  bank  with  a  Federal  Reserve  Bank 
may,  under  the  regulations,  and  subject  to  such  penalties  as  may  be  pre- 
scribed by  the  Federal  Reserve  Board,  be  checked  against  and  withdrawn  by 
such  member  bank  for  the  purpose  of  meeting  existing  liabilities:  Provided, 
however,  That  no  bank  shall  at  any  time  make  new  loans  or  shall  pay  any 
dividends  unless  and  until  the  total  reserve  required  by  law  is  fully  restored.* 

"  It  is  manifest  that  items  in  process  of  collection  can  not  lawfully  be  counted 
as  part  of  the  minimum  reserve  to  be  carried  by  a  member  bank  with  its 
Federal  Reserve  Bank.  Therefore,  should  a  member  bank  draw  against  such 
items  the  draft  would  be  charged  against  its  reserve  if  such  reserve  were 
sufficient  in  amount  to  pay  it;  but  any  resulting  impairment  of  reserves 
would  be  subject  to  all  the  penalties  provided  by  the  act. 

"  Inasmuch  as  it  is  essential  that  the  law  in  respect  to  the  maintenance  by 
member  banks  of  the  required  minimum  reserve  shall  be  strictly  complied 
with,  the  Federal  Reserve  Board,  under  authority  vested  in  it  by  section  19 
of  the  act,  hereby  prescribes  as  the  penalty  for  any  deficiency  in  reserves  a 
sum  equivalent  to  an  interest  charge  on  the  amount  of  the  deficiency  of  2 
per  cent  per  annum  above  the  ninety-day  discount  rate  of  the  Federal  Reserve 
Bank  of  the  district  in  which  the  member  bank  is  located.  The  Board  reserves 
the  right  to  increase  this  penalty  whenever  conditions  require  it. 

"Member  banks  can  at  all  times  arrange  to  keep  their  reserves  intact  by 
rediscounting  with  their  Federal  Reserve  Bank. 

*'  (6)  Each  Federal  Reserve  Bank  will  determine  by  analysis  the  amounts 
of  uncollected  funds  appearing  on  its  books  to  the  credit  of  each  member 


14  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

bank.  Such  analysis  will  show  the  true  status  of  the  reserve  held  by  the 
Federal  Reserve  Bank  for  each  member  bank  and  will  enable  it  to  apply  the 
penalty  for  impairment  of  reserve. 

"A  schedule  of  the  time  required  within  which  to  collect  checks  will  be 
furnished  to  each  member  bank  to  enable  it  to  determine  the  time  at  which 
any  item  sent  to  its  Federal  Reserve  Bank  will  be  counted  as  reserve  and 
become  available  to  meet  any  checks  drawn. 

"(7)  In  handling  items  for  member  banks,  a  Federal  Reserve  Bank  will 
act  as  agent  only.  The  Board  will  require  that  each  member  bank  authorize 
its  Federal  Reserve  Bank  to  send  checks  for  collection  to  banks  on  which 
checks  are  drawn,  and,  except  for  negligence,  such  Federal  Reserve  Bank 
will  assume  no  liability.  Any  further  requirements  that  the  Board  may  deem 
necessary  will  be  set  forth  by  the  Federal  Reserve  Banks  in  their  letters  of 
instruction  to  their  member  banks. 

"  (8)  The  cost  of  collecting  and  clearing  checks  must  necessarily  be  borne 
by  thebanks  receiving  the  benefit  and  in  proportion  to  the  service  rendered. 
An  accurate  account  will  be  kept  by  each  reserve  bank  of  the  cost  of  perform- 
ing this  service  and  the  Federal  Reserve  Board  will,  by  rule,  fix  the  charge, 
at  so  much  per  item,  which  may  be  imposed  for  the  service  of  clearing  or 
collection  rendered  by  the  reserve  banks,  as  provided  in  section  16  of  the 
Federal  Reserve  Act. 

In  addition  to  the  Board's  regulation,  copies  of  which  were 
sent  to  the  Federal  reserve  banks  and  member  banks  alike,  each 
of  the  twelve  Federal  reserve  banks  promulgated  a  series  of  rules 
and  regulations  governing  member  banks,  and  state  banks 
having  relations  with  its  collection  department.  These  relations 
are  generally  identical.  Those  promulgated  by  the  Federal 
Reserve  Bank  of  Philadelphia,  issued  under  date  of  June  9,  1916, 
are  in  part  as  follows : 

"...  Accordingly,  under  the  authority  of  the  Federal  Reserve  Act,  and  by 
direction  of  the  Federal  Reserve  Board,  the  Federal  Reserve  Bank  of  Phil- 
adelphia will  inaugurate  on  July  15,  1916,  a  system  for  collecting  checks  drawn 
on  banks  located  in  all  sections  of  the  United  States.  On  and  after  said  date 
this  Bank  will  receive  on  deposit  at  par  from  its  member  banks,  checks  on  all 
member  banks  in  the  United  States  wherever  situated  and  in  addition  checks 
on  all  non-member  banks  in  the  United  States  which  can  be  collected  by 
Federal  reserve  banks  at  par.  A  list  of  the  latter  banks  will  shortly  be  for- 
warded to  you  and  revisions  thereof  will  be  issued  from  time  to  time.    Imme- 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  IS 

diate  credit  entry  will  be  made  for  all  items  received,  subject  to  final  payment. 
The  proceeds  of  such  items  will  not,  however,  be  available  for  withdrawal, 
nor  count  as  reserve  until  the  lapse  of  time  indicated  in  the  attached  schedule, 
which  for  your  convenience  has  been  divided  into  four  groups,  with  divisions 
according  to  State  lines,  rather  than  Federal  reserve  districts.  On  the  other 
hand,  items  forwarded  for  payment  to  banks  in  this  district  will  not  be  charged 
to  the  account  of  paying  banks  until  the  second  business  day  after  they  have 
been  forwarded  by  this  Bank;  thus  enabling  the  member  bank  to  calculate 
accurately  the  amount  necessary  to  be  sent  us  to  maintain  its  average  reserve 
unimpaired.  A  careful  study  of  the  following  description  of  the  plan  of  opera- 
tion will  enable  you  to  avail  yourselves  of  the  collection  service. 

"Exchange  Charges. — Since  the  Federal  Reserve  Act  requires  Federal 
reserve  banks  to  receive  checks  on  their  member  banks  on  deposit  at  par, 
the  Federal  Reserve  Board  will  not  permit  Federal  reserve  banks  to  pay  or 
allow  any  exchange  charges,  and  as  the  proposed  plan  is  a  reciprocal  clearing 
arrangement,  member  banks  must  therefore  cover  at  par  all  checks  drawn 
upon  themselves  received  from  us  or  for  our  account,  since  such  checks  will 
have  been  accepted  by  us  on  deposit  at  par. 

"  In  case  a  member  bank  fails  to  receive  from  its  customers  in  the  regular 
course  of  business  checks  on  other  communities  sufficient  in  amount  to  offset 
the  checks  on  itself  forwarded  by  us,  and  recognizing  the  principle  that  all 
checks  are  payable  only  at  the  counter  of  the  bank  on  which  they  are  drawn  1 
the  privilege  will  be  given  to  member  banks  to  ship  us  lawful  money  or  Federa, 
reserve  notes  from  their  own  vaults  at  our  expense  to  cover  checks  received 
from  us  or  for  our  account. 

"Items  Forwarded. — Items  on  member  banks  in  this  district  will  be  for- 
warded direct  to  the  paying  banks  and  will  be  charged  to  their  accounts  on  the 
second  business  day  after  the  date  of  sending,  thus  allowing  us  time  to  receive 
advice  of  payment. 

"Liability. — Every  member  bank  forwarding  to  us  items  referred  to  herein 
will  be  understood  to  have  agreed  to  the  terms  and  conditions  set  forth  in  this 
circular.  In  receiving  such  items,  the  Federal  Reserve  Bank  of  Philadelphia 
will  act  only  as  the  collecting  agent  of  the  sending  bank,  assuming  no  responsi- 
bility other  than  the  exercise  of  due  diligence  until  the  funds  are  actually  in  its 
hands.  The  Federal  Reserve  Bank  of  Philadelphia  is  authorized  to  send  such 
items  for  payment  direct  to  the  banks  on  which  they  are  drawn.  There  shall 
be  no  liability  on  the  part  of  the  Federal  Reserve  Bank  of  Philadelphia  by 
reason  of  its  not  having  collected  any  such  items  in  cash,  or  because  of  its 
inability  to  return  any  such  items  to  the  member  banks  from  which  they  were 
received.  In  the  event  of  the  suspension  or  insolvency  of  the  bank  on  which 
any  such  items  are  drawn  the  Federal  Reserve  Bank  of  Philadelphia  is  author- 


16  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

ized  to  charge  the  proportionate  amount  of  any  and  all  items  for  which  it  has 
not  received  payment  to  the  account  of  the  member  banks  from  which  such 
items  were  received. 

**  Restrictions  as  to  Endorsements. — In  the  interest  of  good  banking,  the 
indirect  routing  of  items  will  be  discouraged,  and  member  banks  will  not  be 
allowed  to  deposit  with  us  items  payable  in  other  districts  which  bear  the 
endorsement  of  member  banks  located  outside  of  this  district. 

"District  Routine. — Whenever  time  can  be  saved  and  the  volume  of  busi- 
ness between  points  located  within  or  without  the  district  warrants  direct 
interchange  of  items,  such  direct  interchange  will  be  encouraged.  Balances 
arising  from  such  methods  of  collection  may  be  settled  by  drafts  on  a  Federal 
reserve  bank. 

**  Non-member  Bank  Checks. — Letters  will  be  sent  to  all  non-member  banks 
in  this  district  offering  them  the  opportunity  to  remit  at  par  on  receipt  for 
checks  on  themselves  either  in  satisfactory  exchange,  or  by  shipments  of 
currency  at  the  expense  of  the  Federal  reserve  bank.  Since  it  is  desirable  to 
give  preference  to  member  banks  in  the  collection  of  non-member  items,  we 
recommend  that  you  make  mutually  satisfactory  arrangements  with  the  non- 
member  banks  in  your  community  for  the  collection  of  non-member  items  and 
advise  us  of  the  conclusions  reached. 

"Service  Charge. — The  Federal  Reserve  Act  provides  that  charges  to  be 
fixed  by  the  Federal  Reserve  Board  may  be  imposed  for  the  service  of  collec- 
tion rendered  by  the  Federal  reserve  banks. 

"  Under  this  authority  the  Federal  Reserve  Board  has  fixed  a  service  charge 
of  IH  cents  per  item,  to  be  made  for  the  depositing  bank  and  to  be  debited  to 
the  member  bank's  account  monthly,  such  service  charge  to  be  based  on  the 
estimated  actual  cost  of  handling  the  items.  No  service  charge  will  be  made 
to  member  banks  in  this  district  on  items  payable  in  Philadelphia. 

"  It  is  hoped  that  as  the  system  develops  the  cost  of  operation  will  tend  to 
decrease  and  that  it  will  soon  be  possible  to  reduce  the  service  charge.  This 
will  largely  depend  on  the  cordial  co-operation  of  the  member  banks. 

"Sorting. — Careful  sorting  of  items  on  the  part  of  member  banks  will 
materially  reduce  the  handling  by  this  Bank  and  the  saving  in  expense  will 
therefore  tend  to  reduce  the  service  charge. 

"  Items  sent  for  credit  should  be  divided  into  the  following  five  classes  and 
listed  on  separate  sheets: 

"1.     Items  immediately  available  as  per  accompanying  schedule. 

"2.     Items  drawn  upon  one-day  points,  as  per  accompanying  schedule. 

"3.     Items  drawn  upon  two-day  points,  as  per  accompanying  schedule. 

"4.     Items  drawn  upon  four-day  points,  as  per  accompanying  schedule. 

"5.     Items  drawn  upon  eight-day  points,  as  per  accompanying  schedule. 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  17 

"District  Number. — Member  banks  and  those  non-members  which  have 
agreed  to  remit  at  par,  are  urged  to  have  imprinted  on  their  checks  the  number 
'  3 '  in  large  skeleton  figures  in  the  center  of  the  check.  It  is  important  that 
this  be  done  as  quickly  as  possible,  as  the  use  of  the  district  number  will 
facilitate  the  sorting  of  checks,  thereby  tending  towards  a  reduction  in  the 
service  charge.     It  is  also  suggested  that  the  words: 

"  'COLLECTIBLE  AT  PAR  THROUGH  THE  FEDERAL  RESERVE 
BANK  OF  PHILADELPHIA' 

be  stamped  or  printed  on  all  checks  drawn  on  member  banks  in  this  district 
and  on  those  non-member  banks  in  this  district,  which  have  agreed  to  remit 
at  par. 

"  Penalty  for  Deficient  Reserves. — In  order  that  we  may  know  that  member 
banks  maintain  adequate  reserves  with  us,  you  are  requested  to  report  to  us 
at  the  end  of  each  month,  on  forms  to  be  furnished,  the  average  reserves 
required  of  your  bank  to  be  on  deposit  with  us  for  the  month.  The  Federal 
Reserve  Board  circular  provides  for  the  assessment  of  penalties  for  impairment 
of  reserves  and  a  penalty  rate  for  such  impairment  has  been  fixed  at  2  per  cent 
above  the  discount  rate  of  this  bank  for  90-day  paper,  but  in  no  case  less  than 
6  per  cent. 

"Protest  Instructions, — It  is  recommended  that  all  cash  letters  bear  sub- 
stantially the  following  instructions  governing  the  protest  of  items: 

"Protest  all  items  over  $10.00  except  those  bearing  the  stamp  N.P.  3-4  or 
similar  authority  of  a  preceding  bank  endorser. 

"  'Telegraph  non-payment  of  items  of  $500.00  or  over.' 

"  Items  bearing  other  special  instructions  should  be  forwarded  in  a  separate 
letter. 

"  Time  for  Receiving  Items. — Immediate  credit  entry  subject  to  final  pay- 
ment will  be  given  for  all  items  received  each  day  before  2.00  P.  M.  (except 
Saturday  when  the  hour  will  be  12  noon),  items  received  after  these  hours  will 
be  included  in  the  following  day's  business.  Unpaid  items  not  subject  to- 
protest  must  be  returned  on  the  day  after  receipt.  Unpaid  items  must  not  be 
held  for  any  purpose  except  for  immediate  protest.  Returned  items  should  be 
sent  direct  to  depositing  bank  with  advice  to  us.  Protested  items  should  not 
be  forwarded  a  second  time  as  cash  items. 

"  Method  of  Endorsing  Items. — All  items  forwarded  to  the  Federal  Reserve 
Bank  of  Philadelphia,  must  be  endorsed  without  restriction  to  the  order  of 
the  Federal  Reserve  Bank  of  Philadelphia,  with  all  prior  endorsements 
guaranteed,  and  show  on  each  side  of  the  endorsement  stamp  the  American 
Bankers'  Association  transit  number  in  prominent  type. 

"An  endorsing  stamp  will  be  furnished  to  each  member  bank. 


18        THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

"In  due  course,  letters  will  be  sent  to  member  banks  suggesting  methods 
of  accounting,  forms  of  remittance  letters,  etc. 

"The  Federal  Reserve  Bank  of  Philadelphia  reserves  the  right  to  add, 
alter,  or  amend  the  foregoing  plan  of  operation." 

The  Time  Schedules. — ^The  term  clearing  cannot  be  correctly 
applied  to  the  present  operations  of  the  Federal  reserve  check 
collection  system.  Checks  are  not  exchanged  nor  are  differences 
between  banks  settled.  The  system  differs  from  the  operations 
of  the  voluntary  plan  and  the  City  Department  of  the  ordinary 
clearing  house.  The  reserve  banks  maintain  a  collection  depart- 
ment or  transit  department,  which  collects  checks  deposited  by 
their  members.  Technically  the  bank  acts  as  agent  for  its 
member  bank  customer,  receiving  the  items  for  collection; 
credit  being  given  immediately,  but  this  credit  is  available  only 
after  the  remittances  have  been  received  for  the  items  from  the 
banks  on  which  they  are  drawn.  It  can  be  accurately  determined 
when  remittances  will  be  received,  so  for  convenience,  a  time 
schedule  is  arranged  informing  the  depositing  banks  when  the 
proceeds  of  deposited  items  will  be  available.  The  time  schedules 
for  all  the  Federal  reserve  banks  diagramatically  expressed, 
appear  on  page  19. 

This  chart  shows  when  the  proceeds  of  a  check  drawn  on  any 
point  in  the  United  States  are  available,  except  checks 
drawn  on  banks  in  District  No.  11.  With  the  exception 
of  Districts  No.  1,  Boston,  No.  2,  New  York  and  No.  12,  San 
Francisco,  only  items  drawn  on  member  banks  and  banks  as 
listed  in  a  printed  schedule,  which  have  agreed  to  remit  at  par, 
can  be  deposited  with  the  Federal  Reserve  Banks.  These  sched- 
ules will  be  referred  to  later.  The  object  of  this  chart  is  to  show 
when  the  funds  created  by  the  deposit  of  foreign  items  in  a 
Federal  reserve  bank  are  available  for  use  by  the  member. 
For  example,  a  bank  in  Maine  sends  to  the  Federal  Reserve 
Bank  of  Boston  items  drawn  on  a  bank  in  Alabama ;  the  chart 
shows  four  days — that  is  four  days  after  receipt  by  the  Boston 
Reserve  Bank — ^the  funds  will  be  available  for  use  by  the  deposit- 
ing Maine  bank.  Items  on  California  require  eight  days,  includ- 
ing items  on  San  Francisco,  the  Federal  reserve  city  for  this 


SunnoX^ 

OC 

« 

oo 

" 

« 

^ 

« 

-= 

' 

"- 

o 

UlSUODSI^V\ 

^          1^          i^          1^          1^          \^         |<N          1^          p          I"'          1           1^ 

BiuiSijA  IsaM 

.    |.    |.    |T      .      .      .    h    h      .    1     |. 

uo-)3iitqsB^ 

00       [00       [00       [00       [00       joo       |oo       [M       |oo       [00       1        [t^ 

4.Biui3iiA 

<N'*I«-1CS[^<N[(N'*[0<N|CS'*[CS'*[<N'*[<N-*[CSIO[             |0 

1UOUIJ3A 

r.       [^       [cs       [^       [^       [^       (^        [^       [^       [-       [        [- 

- 

q^^n 

00       [00       joo       [00       [00       [00       [00       [oo       |oo       [oo       [        [lo 

4.SBX3X 

TtOO    [   rl.00    [   '■i'OO    [   -^OO    [   'to    [   <N\0    1   tS-*    1   (NO    [   ■*  00    |   «S  lO    |           |   0» 

aassauuax 

TjiTit          ^rji          Tt<          es'^l 

.  \.  \  .  ( 

B-jo^iBa  q^nos 

00       (00       [00       [■^       |>o       [>o       [•^       ["O       [^       [00       1        |o> 

BuxiOiB3  q->nos 

Tt          Irt          1-*          !■*          Its          lit          |t1<          [■*          [^          [«0          1           |0< 

puBisi  apoq-a 

CS          |es          [<N          [■*          l-^          [rj.          [rj.          [tJ.          [■<*<          lio          [           |0> 

IBIUBAIASUUSJ 

-Ht^          ^fvj          OtN          ^T     1    '^•^     1     IN-*          eSTj<          «STj< 

«SrJ<       «SiO                 0»       1 

U033JO 

00       [00       [«       [00       [00       [00       [00       [00       [00       [oo       [        [>o 

Emoq^iiio 

00          [00          loo          [00          [00          [«          [■*          [•*          [00          [fO         [           [OS 

-l-oiqo 

1  CS-*  1  ts"*  [  0«s  [  (N-*  [  (NTf  I  «STi.  1  {N't  1  «S'<J<  1  es«o  [ 

OS 

B:j03iBa  q-lJON 

00       [00       (00       [■*       [o       (vo       [Tj<       [o       [■*       [00       [ 

us 

BunojB3  q-»JOM 

■*          (Tt          |it          (■*          [CS          (■*          [Tf          (•*          [■*          |»0          [            (CA 

I^JOA  M3N 

^<N  (  oes  (  OCN  [  es-*  [  0-*   (  «N'<^   [  (N-*   1  (N't   1  «s-*   |  rs  lo   |        (  O 

oopcaj^  Ma^j 

00        [00        [00        [00        \0        [O        [00        [O        [00        |io        [2^1'='' 

Xasjaf  AivaM 

^      [c.      (^      [^      1^      [^      [^      [^      [^      1-^      [^|o> 

ajiqsduiBH  Avajsi 

C>»          (<N          |«M          (■<j<          [■*          ["*          [■*          [■*          [■*          [*«          IWI®' 

BPBA3M 

00       [00       (00       [00       [00       [00       [00       [00       joo       [oo       j^l"^ 

B3lSBjq3M 

00          [00          (00         [•*          (00          \0          ["*          [rj.          [Tj.          |P0          [pQjOv 

BUBIUOPV 

00       joo       (00       (00       («       (>o       (00       (00       (■*       (00       (h(o 

lunossjl^     1  (N^  1  JN-*  j  es"*  1  es-*  j  NTj<     CNT*.  |  «nt|.  j  ?T     es-*  j  JfO   ^     o 

tddississTH    l^l^l-i"!-*-        ^U|^        T        ^        "^IhI 

iBlosauuiH    1  ^-t  1  -'^  1  -^^  1  -^^  r  ^  r  ^  1  ^'*'  1  ^^  1  <=>-•  1  ^"^  1  H  1  o 

uBSiqoTw  r  r  r  r  r  r  i"*  r  r  r  i-i* 

isWsnqoBSSBW    |  oc.  ]  -^  |  -^^  |  -.^  |  -^  |  ^^  |  ^^  |  -^^  |  -^^  |  '^'^  Dg  |  o 

PUBIAJBK     1^       1^       1^       1^       1^       1'*       1'*       1^       1^       1"^       |W|<^ 

3UIBJM      1^         1^         i^         1^         1^         1^         1"*         1^         1^         l"^         \(^\^ 

iBUBismoq    1  ^«  1  ^00  1  ^00  1  ^^  1  ^^  1  ^^  1    |  ^  |  cs^  |    |  ^  |  ^u,  |  ^  | 

A3iDn:m3:5i    I'*      1"*!^      II      1^1^        ^        Z      \^ 

in        W     OS     1 

sbsub:h   r     r     1^     r     1*     1^     1^     1^     1"°     I"'     l^l"" 

BMoi  1^  1^  r  r  r  r  i^  r  r  i^^  i^i°^ 

BUBipUI      |tJ.            rJ.|Tj.|Tj.            ^I^I^III"*'!'^            Q^ 

4.SIOUIin      |(N'*[<M'*j(N'*|-<Tt 

M-*       (N-*       OP< 

-SI-I-" 

«l. 

-ouBDT  I*'  i«   i«  r   r   r   r   r   r   r  i^io. 

r;"T3i09r^  ,  ..^  1  ^.^  1  ^^  1  ..^  P^  1 6^  1  ^^  1  cs^  1  ^-*  1  ^.O  1  o  1  ^ 

BouoM  1-  i-  r  r  r  r  r  r  r  i-  i^i. 

Mo-.io-isia  1-^  r  r  r  r  r  r  r  r  r  loia 

aiBMBTaa  1-  n  1"  r  r   r  r  r  i^  r  i^u 

■  monoauuor,  r  r  p  1^  r  r  r  r  r  r  i    !c^ 

opBioio-^  i«  i«  r  r  r  1^  r  i^  r  r  i   i* 

iBmiOmBn     1  0000   1  00*   1  0000   1  OOOO   1  OOO   1  OOO    1  ^00   1  ^00   1  ^00   1  rooo    1         1  o.^ 

sBsuB^w  r  r  r  i^  r  r  r  r 

^ 

CO        ,          1 

BU02UV      1  * 

00           |X           [00           [«           [00           (00           (OO 

u. 

00        1         [U, 

BraBqBiv    1  ^ 

^ 

"  r 

^ 

^   (^   (^ 

.o       1        |a 

1 
1 

1 

1 

:a 

c 

1 

c 

1 

c. 

(2 

1 

1 

,2 

.= 

1 

> 

1 

•c 

1 

1 

20  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

district.  Items  on  Illinois  require  four  days,  but  those  on 
Chicago — the  seat  of  a  Federal  reserve  bank — ^require  two  days. 
The  differences  are  due  to  the  time  required  to  forward  the  items 
for  collection  and  receive  a  remittance  therefor  by  mail. 

Organization  of  the  Collection  Department. — ^The  collection  or 
transit  department  of  the  Federal  Reserve  Bank  of  Philadelphia 
is  under  the  supervision  of  the  cashier  and  directly  in  charge  of  a 
transit  manager,  who  has  under  his  jurisdiction  thirty-five 
clerks.  The  equipment  consists  of  thirty-five  duplex  adding 
and  listing  machines  and  six  listing  machines  with  a  typewriter 
attachment  designed  to  describe  the  items,  one  electric  letter 
opener,  one  electric  endorsing  machine,  and  one  electric  letter 
sealing  machine.  These  are  contained  in  a  room  25'  x  60',  two 
walls  of  which  are  a  solid  line  of  sorting  racks.  In  the  center  of 
the  room  are  long  tables  with  another  row  of  tables  at  one 
end  making  a  T-shaped  arrangement. 

The  plan  contemplates  two  transit  settlements  each  day, 
namely,  the  morning  or  A.  M.  settlement  and  the  afternoon  or 
P.  M.  settlement.  The  mail  which  arrives  at  the  bank  before 
nine  o'clock  and  also  all  deposits  received  from  the  Philadelphia 
banks  before  this  time  are  included  in  the  morning  work.  The 
mail  which  arrives  at  the  bank  after  nine  o'clock,  as  well  as  the 
checks  received  from  city  bank  messengers  after  that  time,  are 
held  over  for  the  afternoon  work.  The  reserve  bank  will  accept 
all  deposits  until  2.00  P.  M.,  but  after  that  time  and  until  3.30 
P.  M.  will  accept  only  items  of  $1,000  and  over;  all  checks 
arriving  after  2.00  P.  M.,  except  those  of  $1,000  and  over  which 
arrive  at  the  reserve  bank  before  3.30  P.  M.,  will  be  held  over 
until  th^  next  morning. 

On  Saturday  the  first  settlement  is  conducted  as  usual;  the 
second  differs,  however.  The  incoming  mail  closes  at  11.00  A.  M. 
and  deposits  from  local  banks  at  12.00  M.,  instead  of  2.00  P.  M. 
No  provision  is  made  for  later  receipt  of  items  of  $1,000  and 
over.  At  present  the  need  for  a  regulation  covering  the  later 
receipt  of  large  checks  on  Saturday,  has  not  arisen. 

Receiving  and  Sorting  the  Mail. — ^The  early  mail  is  brought  to 
the  bank  from  the  Post  Office  by  a  messenger  at  2.00  A.  M. 
The   Philadelphia  banks  deliver  their   checks  to   the   Federal 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  21 

reserve  bank  at  different  times,  credit  being  entered  in  a  pass 
book  for  the  aggregate  of  each  batch  as  deposited.  Practically- 
all  of  the  morning  city  banks'  deposits  are  received  by  the 
transit  department  before  9.00  o'clock  Some  are  delivered  late 
the  preceding  afternoon;  others  usually  before  8.00  o'clock  in 
the  morning.  Four  clerks  report  for  duty  in  the  transit  depart- 
ment at  6.00  A.  M.,  so  that  the  work  on  these  early  deposits 
will  be  well  under  way  and  the  bulk  of  the  mail  opened  and 
properly  sorted  for  the  remainder  of  the  force  to  work  upon  when 
they  arrive  two  hours  later.  This  sorting  is  done  on  ordinary 
tables  and  consists  of  arranging  the  incoming  mail  into  five 
divisions  conforming  to  the  five  general  ledger  divisions  of  the 
bookkeeping  department : 

1.  Those  letters  coming  from  banks  located  in  towns  of  Pennsylvania  whose 
names  begin  with  the  letters  A  to  D;  banks  in  Delaware  and  that  part 
of  New  Jersey  included  in  District  No.  3. 

2.  "Pennsylvania  E  to  O." 

3.  "  Pennsylvania  P  to  Z." 

4.  Other  Federal  reserve  districts. 

5.  Non-member  state  bank  remittances. 

Then  the  envelopes  are  opened  and  the  mail  is  checked  as 
hereafter  described,  and  made  up  into  batches.  The  envelopes 
contain  the  checks  sent  for  collection  and  credit  by  a  particular 
member  bank.  These  checks  are  drawn  on  member  banks 
situated  throughout  the  United  States,  and  on  such  non-member 
banks  as  have  agreed  to  remit  at  par  to  the  Federal  reserve 
bank  of  their  district.  Each  member  bank,  as  we  have  seen, 
is  supplied  from  time  to  time  by  the  Federal  Reserve  Board 
with  printed  schedules,  in  which  are  listed  by  Federal  reserve 
districts,  sub-divided  according  to  states,  towns  and  cities,  all 
banks  in  the  United  States  which  remit  at  par  to  the  Federal 
reserve  bank  of  their  district.  The  lists  contain  the  names  of 
all  the  members  of  the  Federal  reserve  system,  and  in  addition 
they  contain  the  names  of  all  state  institutions  which  have 
made  arrangements,  through  a  member  bank  or  directly  with  a 
Federal  reserve  bank,  to  remit  at  par  to  the  Federal  reserve 
bank  of  their  district  for  all  checks  presented  to  them.     On 


22  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

April  15,  1917,  checks  on  8,607  non-member  state  banks,  in 
addition  to  the  7,625  national  and  state  member  banks,  were 
collected  at  par  by  the  Federal  reserve  banks — a  total  of  16,232 
banks,  or  approximately  60  per  cent  of  the  total  banks  of  all 
classes  in  the  United  States.  Three  out  of  the  twelve  Federal 
reserve  banks — those  situated  in  New  York,  Boston  and  San 
Francisco — accept  checks  on  every  bank  in  their  district. 

The  Cash  Letter. — ^A  cash  letter,  as  it  is  called,  accompanies 
each  bank's  daily  deposit  of  checks. 

The  depositing  bank  is  requested,  in  making  up  its  cash 
letter,  to  describe  the  bank  upon  which  each  check  is  drawn, 
either  by  inserting  the  name  or  the  number  of  such  bank,  accord- 
ing to  the  universal  numerical  system  adopted  by  the  American 
Bankers'  Association,  and  to  insert  opposite  the  name  or  number 
the  amount  called  for  by  the  check.  The  regulations  of  the 
Federal  reserve  bank  further  require  that  all  items  forwarded 
for  collection  "must  be  endorsed  without  restriction"  to  the 
order  of  the  Federal  reserve  bank  to  which  they  are  sent  *'with 
all  prior  endorsements  guaranteed  and  show  on  each  side  of  the 
endorsement  stamp,  the  American  Bankers'  Transit  number  in 
prominent  type."  The  Federal  reserve  bank  will  furnish  to 
each  member  bank  a  suitable  endorsing  stamp.  The  form  of  the 
endorsement  is  substantially  as  follows: 


Pay  to  the  order  of 
FEDERAL  RESERVE  BANK  OF  PHILADELPHIA 

Prior  Endorsements  Guaranteed, 

3-20  May  5,  1917  3-20 

FIRST  NATIONAL  BANK,  PHILADELPHIA,  PA. 

3-4  Pay  to  the  Order  of  3-4 

Any  Bank,  Banker  or  Trust  Co., 

Prior  Endorsements  Guaranteed. 
FEDERAL  RESERVE  BANK  OF  PHILADELPHIA 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  23 

It  will  be  observed  that  the  above  endorsement  is  a  double 
endorsement,  the  upper  half  constituting  the  endorsement  to  the 
Federal  reserve  bank  by  the  member  bank  and  the  lower  half 
constituting  the  endorsement  by  the  Federal  reserve  bank  to 
"any  Federal  reserve  bank  or  member  bank."  By  having  one 
stamp  containing  both  endorsements  the  reserve  banks  are  saved 
the  work  of  putting  all  checks  sent  to  them  for  collection  through 
the  endorsing  machine.  Checks  collected  through  the  local 
clearing  house  must  be  put  through  the  machine  by  the  reserve 
bank,  as  hereafter  described. 

The  depositing  bank  in  making  up  its  cash  letter  is  urged  to 
arrange  its  items  in  groups  according  to  the  date  on  which  the 
funds  will  be  available,  under  the  rules  of  its  Federal  reserve 
bank.  The  time  schedule  of  the  several  Federal  reserve  banks 
has  been  heretofore  given.  In  order  to  illustrate  the  working 
of  this  schedule,  which  is  in  reality  a  composite  of  the  schedules 
of  the  several  banks,  the  time  schedule  of  the  Federal  Reserve 
Bank  of  Philadelphia  is  here  inserted. 

FEDERAL  RESERVE  BANK  OF  PHILADELPHIA 

On  Receipt 

Cities 

Philadelphia        New  York 

ONE  BUSINESS  DAY  AFTER  RECEIPT 

Boston 
Richmond 


Cities 

TWO  BUSINESS  DAYS  AFTER  RECEIPT 

States 

Atlanta 
Chicago 
Cleveland 
Kansas  City 
Minneapolis 
St.  Louis 

Connecticut 

Delaware 

District  of  Columbia 

Maine 

Maryland 

Massachusetts* 

New  Hampshire 

New  Jersey 
New  York* 
Pennsylvania* 
Rhode  Island 
Vermont 
Virginia* 

FOUR  BUSINESS  DAYS  AFTER  RECEIPT 

Dallas 
New  Orleans 

Alabama 
Arkansas 

Minnesota* 
Mississippi 

Florida  Missouri* 

Georgia*  North  Carolina 

Illinois*  Ohio* 

Indiana*  South  Carolina 

Iowa  Tennessee 

Kansas  West  Virginia 

Kentucky  Wisconsin 
Michigan 


24  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

EIGHT  BUSINESS  DAYS  AFTER  RECEIPT 

San  Francisco  Arizona  North  Dakota 

California  Oklahoma 

Colorado  Oregon 

Idaho  South  Dakota 

Louisiana*  Texas* 

Montana  Utah 

Nebraska  Washington 

Nevada  Wyoming 
New  Mexico 

This  schedule,  as  has  previously  been  stated,  is  constructed 
on  the  basis  of  the  time  required  to  forward  checks  by  mail  to 
the  banks  upon  which  they  are  drawn  and  to  receive  a  remittance 
from  them  in  the  same  fashion. 

In  brief,  the  time  sheet  provides  that  the  deposit  created  by 
checks  sent  to  the  Philadelphia  Reserve  Bank  is  available  for 
use  by  the  member  bank  either  immediately,  or  in  part  after 
one,  two,  four  or  eight  business  days  have  elapsed.  The  deposit- 
ing bank  is  required  to  arrange  its  items  to  conform  with  this 
schedule.  In  listing  the  deposit  a  total  for  each  class  of  credit 
must  be  listed,  and  the  checks  contained  in  the  deposit  separated 
into  batches  by  the  use  of  a  rubber  band  to  conform  with  the 
time  divisions  on  the  latter.  Sub-totals  of  each  division  and  the 
grand  total  of  the  contents  of  each  package  are  given. 

In  ticking  off  or  checking  the  incoming  cash  letter,  each 
check  is  not  compared  with  the  listing  on  the  letter,  the  liability 
of  error  being  so  small  that  it  does  not  pay  to  check  each  item 
on  the  latter,  for  if  a  mistake  has  been  made  by  the  depositing 
bank  it  will  be  detected  later  when  the  checks  are  listed  on  the 
batch  sheets.  Only  the  first  and  last  items  are  scrutinized,  to 
be  certain  that  the  sending  bank  has  made  no  mistake  either 
in  enclosing  the  wrong  cash  letter,  the  wrong  batch  of  checks, 
or  in  misaddressing  the  envelope.  If  the  sending  bank  has 
not  described  the  checks  by  inserting  the  names  or  universal 
numerical  system  symbols  of  the  drawee  banks,  the  omission  is 
corrected  at  this  time.  The  transit  department  does  not  check 
the  cash  letter  as  to  the  arrangement  of  the  items  according  to 
the  time  schedule.  Incorrect  time  listing  can  be  detected  by 
the  analysis  department  when  checking  up  particular  accounts. 


*  Except  cities  as  listed. 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  25 

Up  to  this  point  the  contents  of  each  cash  letter  still  remain 
intact,  the  sorting  thus  far  being  confined  to  a  classification  of 
cash  letters  according  to  the  points  of  origin  of  the  letters. 
For  instance,  the  First  National  Bank  of  Scran  ton's  letter  will 
be  received,  placed  on  the  space  on  the  sorting  table  allotted  to 
"Pennsylvania  P  to  Z,"  then  opened  by  one  of  the  clerks  who 
arrives  at  6.00  o'clock  in  the  morning  and  examined  to  see 
whether  the  proper  package  of  checks  is  enclosed. 

Making  Up  and  Sorting  the  Batches. — ^While  checking  the 
incoming  mail  the  clerk  divides  the  mail  in  each  division  into 
batches.  One  or  more  cash  letters  aggregating  a  pile  of  checks 
about  three  inches  in  height,  weighing  approximately  one  pound 
and  containing  in  the  neighborhood  of  four  hundred  items, 
usually  constitutes  a  batch.  On  the  preceding  afternoon  the 
necessary  number  of  batch  sheets  are  prepared.  The  batch 
sheet  is  a  piece  of  blank  paper  12"  x  19",  which  is  stamped 
on  the  lower  right-hand  corner  as  follows: 

Sorted  by 

Listed  by 

Settled  by 

E— O  No 

These  batch  sheets  are  of  five  kinds;  (1)  Delaware  and  New 
Jersey;  Pennsylvania  A — D;  (2)  Pennsylvania  E — O;  (3) 
Pennsylvania  P — Z;  (4)  Reserve,  and  (5)  "Due  Froms"  that 
is,  remittances  from  state  banks  not  members  of  the  Federal 
reserve  system,  which  have  agreed  to  remit  at  par,  and  are 
making  settlement  for  checks  previously  sent  to  them.  Each 
batch  sheet  is  numbered  so  that  a  missing  sheet  may  be  detected 
later  in  the  make-up  of  the  settlement  sheet. 

A  batch  of  items  is  wrapped  in  a  blank  batch  sheet,  secured 
with  a  rubber  band,  and  passed  to  a  sorting  clerk.  For  the  sake 
of  simplicity,  assume  for  the  present,  that  the  batch  contains 
but  one  cash  letter,  meaning  that  a  member  bank  has  sent  in  a 
letter  accompanied  by  approximately  four  hundred  items.  This 
is  often  the  case.  In  some  instances  one  cash  letter,  because  of  its 
size,  may  be  divided  into  two  or  more  batches.  On  the  other 
hand  as  many  as  ten  or  more  small  cash  letters  are  made  up  on 


26  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

one  batch  sheet.  The  make-up  of  the  batch  sheets,  as  has  been 
said,  is  primarily  based  on  the  quantity  of  checks,  and  not  the 
final  disposition  of  the  items.  The  sorting  clerk  now  takes  the 
batch  and  proceeds  to  break  up  the  portion  of  cash  letter,  or 
the  cash  letters  contained  therein,  sorting  down  the  checks  into 
the  following  divisions : 

1.  Items  payable  through  Philadelphia  Clearing  House. 

2.  Run  (items  drawn  on  banks  and  bankers  in  Philadelphia, 

not  members  of  the  Clearing  House). 

3.  Federal  Reserve  Bank  of  Philadelphia. 

4.  Return  items. 

5.  Delaware  and  New  Jersey. 

6.  Pennsylvania  A — D. 

7.  Pennsylvania  E — O. 

8.  Pennsylvania  P — Z. 

9.  Other  Philadelphia  (outlying  banks  and  trust  companies). 

10.  Eastern  (New  York  State  and  New  England). 

11.  Other  reserve  districts. 

A  word  of  explanation  concerning  the  above  classification  may 
be  helpful.  "Items  payable  through  the  Philadelphia  Clearing 
House"  include  checks  drawn  upon  banks  situated  in  the  City 
of  Philadelphia  and  members  or  associate  members  of  the  clearing 
house.  The  division  "Federal  Reserve  Bank  of  Philadelphia" 
includes  drafts  drawn  by  member  banks  against  their  deposits 
with  the  reserve  bank.  These  drafts  largely  represent  remit- 
tances for  checks  previously  sent  out  for  collection,  the  draft 
being  included  as  a  part  of  the  cash  letter  of  the  member 
bank.  "Return  Items"  constitute  checks  previously  sent 
out  for  collection  but  which  have  been  returned  by  the  bank 
on  which  they  are  drawn  because  of  a  variety  of  reasons, 
as  for  example,  because  the  person  drawing  the  check  has  no 
account  with  the  bank  on  which  he  has  drawn.  Such  "return 
items"  it  will  be  observed,  are  included  in  the  deposit  of  the 
bank  for  the  current  day,  and  under  the  rules,  constitute  items 
for  which  immediate  credit  will  be  given.  The  Federal  reserve 
bank  will  return  them  in  the  day's  collection  to  the  institution 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  27 

which  had  originally  sent  them  in  for  collection,  immediately 
charging  them  therefor.  In  making  this  immediate  charge 
the  transit  department  fills  out  and  sends  a  duplicate  advice, 
the  original  of  which  goes  to  the  member  bank  together  with  the 
checks  sent  out  that  day  for  collection.  The  duplicate  goes  to 
the  bookkeepers  as  the  basis  of  the  debit  entry. 

The  "Eastern  Division"  includes  the  checks  drawn  on  all 
banks  situated  in  New  York  State  and  in  New  England.  This 
division  is  made  separately  from  that  of  "other  reserve  dis- 
tricts", because  of  the  large  volume  of  checks  to  be  collected  on 
New  York  and  New  England  points.  All  checks  drawn  on 
banks  in  reserve  districts  other  than  New  England  (District 
No.  1)  and  New  York  (District  No.  2) — ^whether  drawn  against 
Federal  reserve  banks  or  any  member  bank  or  the  state  institu- 
tions situated  in  such  districts  which  have  agreed  to  remit  at 
par,  are  included  in  the  division  "other  reserve  districts."  All 
such  checks  are  sent  for  collection  to  the  Federal  reserve  bank 
for  each  particular  district.  It  is  altogether  likely  that,  as 
the  volume  of  inter-district  business  continues  to  grow,  this 
latter  group  will  be  sub-divided  in  order  to  facilitate  the  work. 

After  a  clerk  has  sorted  the  batch  he  hurriedly  goes  over  the 
sorting  to  correct  any  missorts  which  may  have  crept  in.  The 
sorting  clerk  then  initials  the  "sorted  by"  in  the  lower  right- 
hand  corner  of  the  batch  sheet. 

Listing  the  Batches. — ^The  batch  now  goes  to  a  listing  clerk,  who 
inserts  the  blank  batch  sheet  into  a  duplex  adding  machine  and 
lists  all  checks  for  the  Clearing  House  in  one  column,  printing 
the  total,  the  duplex  machine  transferring  the  total  of  these 
checks  to  the  lower  counter  of  the  machine.  Likewise  all  the 
checks  for  the  "Run"  are  listed  in  another  column.  A  total 
is  struck,  this  total  being  transferred  and  added  to  the  clearing 
house  total  and  carried  in  the  lower  counter.  The  other  divisions 
are  similarly  run  up  in  turn,  the  grand  total  being  carried  as 
described  above,  and  finally  printed  when  the  listing  of  the 
batch  is  completed.  The  completed  sheet  shows  the  checks  in 
their  proper  columns  with  the  total  for  each  column  and  a  grand 
total  for  all  the  columns  on  the  sheet.  This  grand  total  must 
agree  with  the  total  of  the  cash  letter,  which  in  this  illustration 


28  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

made  up  the  batch.  Each  column  is  then  properly  marked  by 
the  listing  clerk,  namely  Clearing  House  as  C.  H.  ,Run,  R., 
Pennsylvania  A — D,  A — D,  etc.  These  captions  are  necessary, 
because  no  particular  order  is  followed  in  listing  the  divisions 
nor  does  each  batch  necessarily  contain  checks  for  each  transit 
division.  In  case  the  grand  total  on  the  batch  sheet  agrees  with 
the  total  on  the  cash  letter,  the  listing  clerk  then  initials  "listed 
by"  and  turns  the  completed  batch  sheet  and  the  checks  over 
to  the  settling  clerk.  In  case  the  listing  clerk  finds,  after  he  has 
run  up  the  batch  sheet,  that  the  total  of  the  batch  sheet  and 
the  total  of  the  cash  letter  does  not  agree,  he  immediately 
checks  back  his  work.  If  he  does  not  locate  the  error  he  turns 
it  over  to  the  settling  clerk  who  must  locate  and  reconcile  the 
difference  before  the  particular  batch  is  run  through  the  depart- 
ment. This  may  involve  locating  an  error  on  the  batch  sheet 
or  the  cash  letter  may  be  at  fault.  If  the  letter  is  incorrect,  the 
letter  is  changed  and  a  memorandum  is  made  of  the  essential 
information  so  that  the  Federal  reserve  bank  may  write  to  the 
member  bank  in  question  advising  it  of  the  mistake. 

Should  more  than  one  cash  letter  be  included  in  the  batch, 
the  checks  are  sorted  and  listed  in  the  same  manner  as  described 
above,  and  when  the  listing  is  completed  the  aggregate  totals 
of  the  cash  letters  must  agree  with  the  grand  total  of  the  batch 
sheet.  The  totals  of  the  cash  letters  are  listed  separately  on 
the  batch  sheet  and  each  total  is  followed  by  the  name  of  the  bank 
which  sent  the  letter.  If  the  aggregate  totals  do  not  agree  the 
work  must  be  checked  back  and  the  error  located  and  corrected. 
In  view  of  the  fact  that  making  up  the  batch  sheets  will  dis- 
close any  errors  which  may  have  been  made  by  the  banks  in 
their  cash  letters,  the  mail  is  not  carefully  checked  when  opened. 

When  cash  letters  are  very  large,  such  as  those  coming  from 
the  larger  banks  in  Philadelphia,  it  is  customary  to  split  the 
letter  into  two  or  more  batches.  As  a  matter  of  fact,  a  letter  of 
this  size  will  consist  of  two  or  more  pages  and  the  Federal  reserve 
bank  requires  in  such  cases  that  there  be  inserted  as  well  a 
recapitulation  sheet,  appropriately  designated  as  such,  on  which 
is  listed  the  totals  of  the  checks  listed  on  each  sheet  of  the  cash 
letter.     It  is  customary,  in  making  up  the  batches,  to  separate 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  29 

the  checks  in  accordance  with  the  pages  of  the  cash  letter, 
that  is  to  say,  the  checks  called  for  by  a  particular  page  and  that 
page  of  the  letter  are  made  up  as  one  batch. 

Should  a  cash  letter  be  large  enough  to  necessitate  splitting 
it  into  two  or  more  batches,  the  clerk  who  made  up  the  batch 
would  indicate  the  fact  on  the  cash  letter  by  noting  the  number 
of  batches  into  which  it  has  been  divided.  A  figure  enclosed 
in  a  circle  is  the  method  followed  by  the  Philadelphia  Federal 
Reserve  Bank.  When  a  split  is  made,  a  regular  numbered  batch 
sheet  is  used,  but  in  addition,  lettered  batch  sheets  are  used  for 
the  listing  of  items  after  they  are  sorted.  For  instance,  if  a 
cash  letter  received  from  the  Fourth  Street  National  Bank  of 
Philadelphia,  is  divided  into  two  batches,  the  checking  clerk 
will,  when  making  up  the  batches,  mark  the  recap  sheet  of  the 
original  cash  letter  with  a  (2)  and  then  will  clip  the  recap  sheet 
to  the  numbered  batch  sheet;  in  this  instance,  Pa.  P — Z  No. 
(whatever  number  happens  to  be  next,)  and  hand  it  to  the  settle- 
ment clerk.  He  will  then  take  an  unnumbered  blank  batch 
sheet  and  mark  it  "A — Fourth  Street  National,"  enclose  the 
checks  chosen  for  the  batch  and  that  part  of  the  cash  letter  which 
includes  these  checks,  put  a  rubber  band  around  the  bundle 
and  hand  it  over  to  the  sorting  clerk.  The  second  batch  is 
wrapped  together  with  the  other  part  of  the  letter  and  checks 
in  a  batch  sheet  and  marked  "B — Fourth  Street  National." 
These  sheets  are  handled  in  the  regular  manner,  but  when  they 
are  completed  the  work  on  the  A  and  B  sheets  is  recapitulated 
by  the  settlement  clerk  on  the  numbered  batch  sheet.  This 
recap  shows  the  totals  of  each  transit  division  on  the  two  batch 
sheets,  a  grand  total  of  the  sheet,  which  must  agree  with  the 
total  of  the  cash  letter,  as  sent  in  by  the  Fourth  Street  National 
Bank.    Sheet  A  and  B  are  then  pinned  to  this  recap  sheet. 

All  completed  batch  sheets  are  turned  over  to  the  settlement 
clerk  who  carefully  looks  over  the  work  to  see  whether  the 
columns  have  been  properly  marked,  and  further  to  see  whether 
the  proper  checks  have  been  included  in  the  proper  column. 
The  listing  clerk  may  have  run  up  checks  belonging  to  two 
different  divisions  under  one  division,  in  which  case  they  must 
be  separated  at  this  time.     This  checking  is  done  by  looking 


so  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

at  the  first  and  last  check  in  each  division,  and  comparing  the 
check  with  the  Hsting  on  the  batch  sheet.  After  doing  this 
the  settlement  clerk  initials  "settled  by,"  detaches  the  batch 
sheets  for  use  in  making  up  the  recapitulation  and  settlement 
sheets,  and  puts  the  bundles  of  checks  in  a  rack  which  contains 
eleven  compartments,  one  for  each  transit  division,  that  is, 
Clearing  House,  Run,  Philadelphia  Reserve  Bank,  Delaware  and 
New  Jersey,  etc.  Thus  all  the  incoming  mail  is  listed  on  batch 
sheets  and  the  checks  belonging  to  each  division  are  concen- 
trated in  this  rack. 

The  organization  of  the  transit  department  is  so  divided 
that  certain  men  are  confined  to  special  divisions,  namely,  two 
clerks  have  charge  of  the  Delaware  and  New  Jersey  Division 
(this  division  includes  only  that  section  of  New  Jersey  which  lies 
in  District  No.  3) ;  two  other  clerks  have  charge  of  Pennsylvania 
A  to  D;  three  of  Pennsylvania  E  to  O;  three  of  Pennsylvania 
P  to  Z;  one  "Other  Philadelphia"  and  six  of  the  "Reserve," 
which  includes  all  checks  drawn  on  cities  outside  of  Federal 
reserve  district  No.  3.  These  divisions  work  independently  of 
each  other.  All  the  clerks,  however,  before  taking  up  the  work 
of  their  sections  make  up  the  batch  sheets  as  described  above. 

The  Recapitulation  Sheet. — ^All  the  batch  sheets  are  assembled 
and  a  recapitulation  made  of  the  eleven  divisions  of  these  sheets. 
The  totals  of  each  division  on  the  batch  sheets  is  listed  on  the 
recap  sheet.  For  example,  the  total  of  the  Clearing  House  is 
taken  off  of  each  batch  sheet  and  listed  on  the  recap  sheet,  the 
total  of  this  column  is  struck,  the  duplex  machine  transferring 
and  carrying  this  amount  in  the  lower  counter;  likewise,  all 
batch  sheet  totals  of  the  Run  are  listed  on  the  recap  sheet,  a 
total  taken,  and  automatically  transferred  to  the  lower  counter 
of  the  machine  and  added  to  the  Clearing  House  total.  After  all 
the  transit  divisions  are  recapitulated  in  this  way,  the  grand 
total  of  all  the  divisions  on  the  batch  sheets,  which  has  been 
accumulated  in  the  lower  counter,  is  printed  on  the  recap  sheet. 
The  totals  of  all  the  cash  letters  are  next  recapitulated  from  the 
batch  sheets  on  the  recap  sheet,  a  grand  total  taken,  which 
total  should  agree  with  the  grand  divisional  total.  Thus,  the 
recap  sheet  shows  in  total  all  the  checks  as  distributed  from  the 
incoming  mail  to  each  division  of  the  transit  department. 


TEE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  31 

However,  there  are  certain  items  which  do  not  come  into  the 
transit  department  through  the  mail.  Government  deposits, 
items  from  the  receiving  and  paying  tellers,  interest  checks 
from  the  discount  department,  and  exchanges,  which  include 
checks  lacking  endorsements  that  have  been  returned  by  the 
city  banks  which  received  them  in  the  city  clearing  from  the 
reserve  bank,  all  go  through  the  transit  department  but  are  not 
handled  in  the  mail.  These  items  go  through  the  regular  channels 
to  the  transit  department  as  previously  described,  that  is,  they 
are  checked,  batched,  listed  and  racked  with  the  other  items. 
However,  a  separate  batch  sheet  is  made  up  for  each,  namely, 
government,  paying  teller,  receiving  teller,  exchanges,  discounts. 
These  batch  sheets  are  not  merged  into  the  recap  sheet  but  the 
totals  are  transferred  directly  to  the  settlement  sheet  as  here- 
after described. 

The  Settlement  Sheet — ^The  settlement  sheet  contains  a  division 
for  each  of  the  eleven  divisions  of  the  transit  department.  The 
totals  of  the  divisions  on  the  recap  sheet  are  transferred  to  the 
proper  division  on  the  settlement  sheet.  This  represents  the 
amount  with  which  the  transit  sections  are  charged.  In  addi- 
tion, however,  the  totals  of  the  government,  paying,  receiving, 
discount,  and  exchange  batch  sheets  are  transferred  to  the  proper 
divisions  on  the  settlement  sheet. 

Since  the  completed  settlement  sheet  then  shows  the  aggregate 
amount  of  the  checks  which  were  given  to  each  division  in  the 
transit  department,  it  follows  that  the  total  of  the  outgoing 
letters  of  each  division  must  agree  with  the  amount  charged 
to  them  on  the  settlement  sheet.  The  items  for  the 
"Clearing  House,"  "Run,"  and  "Other  Philadelphia"  divisions 
have  been  checked  and  verified  with  the  debits  against  these 
departments  on  the  settlement  sheet.  The  aggregate  of  the 
outgoing  letters  comprised  in  each  of  the  divisions — such  as 
Delaware  and  New  Jersey,  for  example — must  equal  the  aggre- 
gate charged  to  that  division.  Thus  there  is  a  check  on  the 
work  of  the  entire  transit  department. 

The  Philadelphia  Clearing  House  Items. — ^The  checks  for  the 
Philadelphia  Clearing  House  must  be  taken  care  of  first,  as  the  city 
clearing  takes  place  at  10  A.  M.,  and  the  rules  of  the  association, 


32        THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

penalize  the  tardy  members.  To  facilitate  the  work  of  this 
handle  the  clearing  house  items.  Each  morning  the  clearing 
section  several  men  are  taken  from  their  regular  divisions  to 
house  department  has  on  hand  checks  received  the  preceding 
day,  which  arrived  after  the  city  clearing  for  that  day.  These 
checks  are  "racked  down"  or  sorted  into  a  rack  contain- 
ing a  compartment  for  every  member  of  the  clearing  house. 
A  rack  consists  of  a  series  of  pigeon  holes,  large  enough  to 
accommodate  the  ordinary  check,  each  clearing  house  member 
having  a  pigeon  hole.  The  front  of  the  rack  is  open,  the  back 
is  covered  with  a  wire  net.  The  pigeon  holes  are  approximately 
three  inches  wide,  eight  or  nine  inches  deep,  and  of  varying 
height.  The  racks  are  so  constructed  that  the  height  of  the 
pigeon  holes  or  compartments  can  be  adjusted.  The  average 
rack  is  about  three  feet  high  and  is  set  on  a  table.  The  width  is 
determined  by  the  number  of  compartments  necessary,  and  the 
ability  of  one  or  two  men  to  work  efficiently  in  sorting  checks 
into  the  same  rack. 

After  the  sorting  is  completed  and  the  work  verified,  the 
checks  drawn  on  each  member  are  listed  separately  in 
adding  machine  on  a  duplicate  slip,  the  total  being  printed 
at  the  bottom,  and  the  listing  verified.  A  rubber  band  is 
placed  around  the  checks  and  the  original  of  the  slip 
and  the  package  is  inserted  in  the  clearing  house  envelope, 
addressed  to  the  clearing  house  member  in  question,  and  at  the 
same  time,  the  total  called  for  on  the  slip  is  written  in  ink  on  the 
outside  of  the  envelope.  The  envelopes  containing  such  checks 
are  kept  in  a  fireproof  safe  overnight. 

The  checks  received  in  the  morning  mail  are  put  through  the 
electric  endorsing  machine  and  are  then  racked  down.  After 
the  checks  received  in  the  morning's  mail  have  been  racked 
down,  the  checks  for  each  bank  are  listed  on  an  adding 
machine  and  the  total  thereof  indicated.  The  adding  machine 
tape  is  affixed  to  the  checks  with  a  rubber  band  and  inserted 
in  the  envelope,  referred  to  above,  addressed  to  the  member 
of  the  clearing  house.  The  envelope  is  then  handed  to  another 
clerk,     who    again    lists    and    adds    the    morning    checks    on 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  33 

an  adding  machine.  This  operation  will  prove  whether  the 
morning  checks  have  been  correctly  listed  and  that  the  total 
is  accurate.  The  second  tape  forms  the  transit  department's 
record  of  the  morning  checks  included  in  each  package.  Their 
record  of  the  "hold-over"  items  herein  included  is  the  duplicate 
of  the  list  which  has  been  made  out  the  preceding  afternoon. 

The  clerk  in  charge  of  the  city  clearing  department  then  lists 
the  total  of  the  morning  work  included  in  each  envelope  on  the 
outside  of  the  envelope,  and  adds  to  that  figure  the  amount  of 
the  "hold-over"  which  already  appears  thereon.  These  figures 
are  totaled  and  to  prove  the  work  of  the  department,  the  total 
of  each  envelope  is  listed.  The  grand  total  of  all  must  agree 
with  the  total  checks  charged  to  this  department,  as  shown  by 
the  clearing  house  division  on  the  settlement  sheet.  After  the 
work  has  been  proven  the  envelopes  are  sealed  and  secured  by 
sealing  wax. 

In  the  meantime  the  following  lists  are  made  up  to  be  used 
at  the  clearing  house.  The  clearing  house  requires  that  items 
on  what  are  termed  outside  institutions  be  reported  separately. 
These  institutions  maintain  a  limited  membership  in  the  clearing 
house,  which  entitles  them  to  the  clearing  privilege  only.  These 
sheets  and  the  envelopes  for  the  clearing  house  members  are 
now  ready  to  be  taken  to  the  clearing  house.  The  form  of 
the  sheet  is  as  follows: 


34 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 


NO.  4 


THE  FEDERAL  RESERVE  BANK 

ITEMS  ON  OUTSIDE  INSTITUTIONS 
RECEIPTS  FOR  PACKAGES. 


1917 


NO. 

INSTITUTIONS 

AMOUNT 
SENT 

RECEIVED 
BY 

101 

ALDINE  TRUST, 

102 

AMERICAN  BANK  &  TRUST, 

103 

NATIONAL  BANK  OF  COMMERCE, 

104 

CAMDEN  NAT.  BANK, 

105 

CAMDEN,  FIRST  NAT.,  STATE, 

107 

CENTRAL  TRUST, 

108 

COLONIAL  TRUST, 

110 

COMMONWEALTH  TITLE, 

111 

CONTINENTAL-EQUITABLE  T.  &  1., 

113 

FIDELITY  TRUST, 

114 

FRANKLIN  TRUST, 

115 

LIBERTY  TITLE  &  TRUST, 

116 

GUARANTEE  TRUST, 

117 

HADDINGTON  TITLE, 

118 

HAMILTON  TRUST, 

119 

INTEGRITY  TRUST, 

121 

MUTUAL  TRUST, 

122 

NORTHERN  TRUST, 

123 

NORTH  PHILADELPHIA  TRUST, 

124 

NORTHWESTERN  TRUST, 

125 

PEOPLES  BANK  AND  TRUST, 

127 

REAL  ESTATE  TRUST, 

THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 


35 


NO. 

INSTITUTIONS 

AMOUNT 
SENT 

RECEIVED 
BY 

128 

REPUBLIC  TRUST, 

131 

UNITED  SECURITY  L.  INS.  &  T., 

132 

WEST  END  TRUST, 

134 

KENSINGTON  TRUST, 

135 

136 

137 

138 

139 

140 

141 

142 

143 

144 

36 
NO.  4 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 


FROM  FEDERAL  RESERVE  BANK 

RECEIPTS  FOR  PACKAGES 
CLERKS'  PACKAGE  STATEMENT, 


1917 


NO. 

MEMBERS 

AMOUNT 
SENT 

RECEIVED 
BY 

1 

PHILADELPHIA, 

2 

BK.  NORTH  AMERICA  &  TRUST, 

4 

FEDERAL  RESERVE, 

7 

SOUTHWARK, 

8 

KENSINGTON, 

9 

PENN, 

13 

GIRARD, 

14 

TRADESMENS, 

18 

CORN  EXCHANGE, 

19 

UNION, 

20 

FIRST, 

21 

THIRD, 

23 

SIXTH, 

25 

EIGHTH, 

26 

CENTRAL, 

28 

SECURITY, 

33 

NINTH  BANK  &  TRUST, 

34 

TENTH, 

36 

NORTHWESTERN, 

37 

SOUTHWESTERN, 

39 

FOURTH  STREET, 

40 

MARKET  STREET, 

THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 


37 


NO. 

INSTITUTIONS 

AMOUNT 
SENT 

RECEIVED 
BY 

42 

QUAKER  CITY, 

43 

NORTHERN. 

44 

FRANKLIN, 

45 

TEXTILE, 

46 

LAND  TITLE  &  TRUST, 

47 

REAL  ESTATE  TITLE, 

48 

GIRARD  TRUST, 

49 

WEST  PHILA.  TITLE, 

50 

PHILADELPHIA  TRUST 

51 

PROVIDENT  TRUST, 

52 

PENNSYLVANIA  CO., 
CLEARING  HOUSE 

TOTAL, 

The  clerks  also  take  to  the  clearing  house  the  following  credit 
tickets,  which  are  given  to  the  clearing  house  manager  who 
credits  the  bank  on  his  clearing  sheet  with  these  amounts  in  the 
day's  clearing: 


NO.  4 


191 


THE  FEDERAL  RESERVE  BANK  OF  PHILADELPHIA 

TOTAL  CREDITS 


38  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

NO.  4 

191 

FEDERAL  RESERVE  BANK 

TOTAL  OF  ITEMS  ON 
OUTSIDE  INSTITUTIONS 

$ 

The  Federal  reserve  bank  not  only  presents  items  against 
members  of  the  clearing  house,  but  also  receives  in  the  daily 
clearing  drafts  drawn  against  the  accounts  of  its  depositors 
presented  by  members  of  the  clearing  house.  Members  of  the 
Federal  Reserve  Bank  of  Philadelphia  may  have  drawn  drafts 
against  their  balances  in  that  bank  and  these  drafts  may  ulti- 
mately have  been  deposited  with  members  of  the  Philadelphia 
Clearing  House,  who  present  them  through  that  organization 
to  the  Federal  Reserve  Bank.  However,  the  Federal  reserve 
bank  usually  deposits  more  items  for  credit  in  the  clearing  house 
than  are  presented  to  it  in  the  clearing.  This  makes  the  Federal 
reserve  bank  a  credit  bank,  and  gives  it  the  right  to  receive 
the  difference  between  the  credits  and  debits  in  clearing  house 
gold  certificates.  Sometimes,  however,  the  Federal  reserve 
bank  is  a  debtor  and  then  it  must  pay  the  difference  to  the 
clearing  house  in  gold  certificates.  It  would  seem  that  if  the 
Federal  reserve  bank  were  a  creditor  in  the  clearing  house  most 
of  the  time,  it  would  draw  gold  from  the  other  city  banks. 
However,  this  is  not  the  case,  for  the  city  banks  build  up  their 
deposits  with  the  Federal  reserve  bank  by  means  of  out-of-town 
checks,  and  thus  they  create  balances  in  excess  of  the  actual 
reserve  which  the  law  requires  them  to  keep.  They  draw  drafts 
against  these  balances  and  receive  from  the  Federal  reserve  bank 
eligible  funds  with  which  they  pay  their  clearing  house  debit 
balances. 

The  Run  and  Other  Philadelphia  Items. — ^The  "Run"  items  are 
next  taken  care  of.  These  items  are  sorted  in  a  rack  which 
contains  a  compartment  for  every  bank  and  banker  in  Phila- 
delphia, not  a  member  of  the  clearing  house.  A  number  of 
private  bankers  and  a  few  commercial  bankers  comprise  the 
list.  The  process  of  handling  these  items  is  exactly  like  that  of 
handling  the  clearing  house  items,  that  is  to  say,  the  checks  are 
listed,  a  copy  kept  of  the  list  and  then  the  checks  are  put  into 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  39 

envelopes  addressed  to  the  banks  from  which  they  are  to  be 
collected.  The  total  of  these  envelopes  must  agree  with  the 
"Run"  division  on  the  settlement  sheet  before  the  run  is  dis- 
patched.   The  "Run"  is  disposed  of  by  10.30  A.  M. 

Each  runner  is  charged  with  the  total  amount  included  in  the 
envelopes  which  constitute  his  route,  and  the  total  of  the  entire 
run  is  charged  to  the  paying  teller,  to  whom  the  runners  report 
after  they  have  finished  their  business.  A  run  account  in  the 
general  ledger  is  charged  by  the  bookkeeper  for  the  total  of  the 
run  as  shown  by  the  transit  department's  record.  This  account 
is  credited  when  the  runners  return  with  the  proceeds  from  the 
items  which  they  delivered  to  the  several  institutions,  the 
paying  teller  being  charged  with  the  same  amount,  which  he 
accounts  for  in  his  cash  and  cash  items.  The  rules  of  the  Federal 
reserve  bank  allow  run  items  to  be  settled  either  with  a  check 
on  a  Philadelphia  bank  or  in  cash,  so  in  case  the  paying  teller 
receives  Philadelphia  items  he  will  turn  these  over  to  the  transit 
department,  who  will  put  them  through  the  Philadelphia 
clearing  house  on  the  following  day. 

By  11.00  A.  M.  every  check  received  which  is  payable  in 
Philadelphia,  has  left  the  bank  including  items  on  outlying 
national  banks  and  trust  companies,  known  as  "Other  Phila- 
delphia," which  are  listed,  proved  and  mailed  immediately 
so  that  they  will  be  received  by  the  drawee  bank  and  remitted 
for  the  same  day. 

Sorting  Out-Of-Town  Checks. — The  Philadelphia  items  having 
been  settled,  the  clerks  now  proceed  on  the  work  of  their  assigned 
divisions.  Each  division  takes  the  checks  from  the  distributing 
rack,  where  they  were  placed  after  the  batch  sheets  had  been 
settled,  and  sorts  them  into  its  own  racks.  The  rack — sometimes 
called  a  bin — contains  a  compartment  for  every  bank  in  the 
respective  division  to  which  checks  are  sent  for  collection.  To 
verify  the  sorting,  the  clerk  takes  the  checks  out  of  the  first 
compartment,  examines  them  to  see  whether  they  all  bear  the 
name  of  the  bank  designated  on  the  compartment  in  the  rack 
from  which  he  took  them,  then  puts  them  back  and  repeats 
the  operation  for  every  pigeon  hole  or  compartment  in  the  rack. 
It  is  necessary  to  do  this  because  an  experienced  transit  clerk 


40  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

learns  to  know  the  position  of  each  bank's  compartment  in  the 
rack  and  in  sorting,  which  is  done  very  rapidly,  he  may  have 
inadvertently  put  a  check  in  the  wrong  compartment.  This 
verification  will  disclose  the  error  which  is,  of  course,  imme- 
diately corrected. 

Preparing  the  Outgoing  Letters, — ^The  contents  of  each  com- 
partment or  pigeon  hole  is  now  ready  to  be  made  up  on  an  out- 
going letter.  These  letters  consist  of  a  printed  form  made  in 
duplicate,  the  second  sheet  of  which  is  blank,  but  being  attached 
to  the  first  by  a  perforated  edge.  Previously,  carbons  have  been 
inserted  and  sheets  run  through  an  addressograph  so  that  there 
will  appear  under  the  printed  head  "Federal  Reserve  Bank  of 
Philadelphia",  the  name  of  a  particular  bank  (which  will  also 
appear  on  the  carbon).  These  blank  letters  are  arranged  to 
follow  the  order  of  the  rack,  so  they  will  come  to  hand  as  the 
process  of  listing  progresses.  The  checks  in  the  rack  are  now 
taken  out  and  listed  on  the  letter.  The  listing  consists  of  listing 
the  amount  called  for  by  each  check  contained  in  the  compart- 
ment, the  total  being  pulled  at  the  bottom  of  the  letter.  A 
blank  letter  appears  as  follows : 

FORM  28 

FEDERAL  RESERVE  BANK 

OF  PHILADELPHIA 

We  enclose  cash  items  as  listed  below 


Wire  Non-Payment  of  Items  of  $500.  and  over:  DO  NOT  PROTEST 
any  Ittems  of  $10.  or  under,  or  those  stamped  N,  P.  3-4  or  those  with  a  similar 
stamp  of  a  preceding  endorser. 

Frank  M.  Hardt,  Cashier, 

With  the  exception  of  letters  sent  to  other  Federal  reserve 
banks,  checks  are  merely  listed  on  the  letters,  no  description 
accompanying  the  items,  as  it  is  comparatively  easy  to  trace  an 
item  by  the  amount,  and  the  extra  labor  in  describing  checks 
can  not  be  justified.  It  must  be  remembered  that  thirty-five 
clerks  handle  48,000    items  in  a  day.    The  total  of  each  cash 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  41 

letter  listed  is  transferred  to  and  carried  in  the  lower  counter 
of  the  duplex  adding  machine,  so  that  after  all  the  letters  have 
been  made  up,  the  aggregate  totals  of  the  lower  counter  of  the 
machines  in  a  transit  division  must  agree  with  the  total  checks 
charged  to  the  division  by  the  settlement  clerk  on  the  settlement 
sheet.  If  the  totals  do  not  agree  each  clerk  checks  back  his 
work  immediately  in  order  to  locate  the  difference.  A  search 
must  be  continued  until  the  error  is  found,  unless  the  error  is  less 
than  a  dollar  which  can  be  carried  in  the  "difference  account". 
In  effecting  the  divisional  settlement  the  following  form  is 
used : 

DETAILED  SETTLEMENT  OF  THE SECTION 

Struck  Settlement  at o'clock 

over 
Original  difference short 

over 

Final  Settlement short 

Time 

Upon  the  completion  of  this  work  the  report  is  filed  with  the 
manager  of  the  transit  department. 

The  foregoing  description  covers  the  work  of  six  divisions  or 
sections,  viz.:  "Delaware  and  New  Jersey";  "Pennsylvania 
A  to  D";  "Pennsylvania  E  to  O";  "Pennsylvania  P  to  Z"; 
"Eastern"  (meaning  New  York  and  New  England)  and  "other 
reserve  districts."  By  dividing  the  work  into  sections,  two 
positive  advantages  are  secured,  first,  the  well-known  advantage, 
utilized  wherever  possible  in  all  accounting  systems,  of  creating 
groups  of  accounts,  thereby  localizing  errors  and  simplifying  and 
expediting  the  work  of  locating  such  as  occur.  The  second 
advantage  is  that  by  limiting  the  number  of  institutions  handled 
by  one  clerk  or  group  of  clerks,  greater  familiaiity  with  the  work 
can  be  secured,  expediting  its  performance  and  decreasing  the 
likelihood  of  error. 

Presuming  that  a  section  has  been  able  to  settle,  the  outgoing 
letters  are  laid  aside  to  await  the  afternoon  mail,  which  is  handled 
in  exactly  the  same  manner  as  the  morning  mail.  Upon  com- 
pletion of  the  afternoon  sorting  the  same  outgoing  cash  letters 


42  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

are  put  in  the  adding  machines.  The  total  of  the  morning  mail, 
as  called  for  on  the  letter,  is  inserted  in  the  machine  (but  not 
again  printed  on  the  letter)  and  the  listing  of  the  individual 
checks  follows.  Upon  completion  of  the  listing  a  grand  total  of 
the  letter  is  struck  and  also  transferred  and  carried  in  the  lower 
counter  of  the  adding  machine  as  in  the  morning.  The  aggregate 
of  the  grand  totals  in  the  machines  of  the  division  must  agree 
with  the  amount  charged  to  the  division  on  the  settlement  sheet. 
When  the  settlement  has  been  effected  the  outgoing  letters  are 
ready  for  mailing.  The  checks  and  the  first  page  of  the 
letter  are  placed  in  an  addressed  envelope  and  sealed.  The 
duplicates  are  handed  to  the  manager  of  the  transit  department, 
who  transmits  them  in  due  course  to  the  bookkeepers  in  the  bank 
who  use  them  as  the  basis  for  charges  to  the  accounts  of  the 
several  banks  to  which  the  checks  were  sent  for  collection. 

Collection  of  Checks  on  Non-Member  State  Banks. — Included 
among  the  institutions  comprised  in  each  section,  such  as,  for 
example,  "Delaware  and  New  Jersey"  or  "Pennsylvania  A  to 
D,"  are  many  state  institutions  which,  while  not  members  of  the 
Federal  reserve  system,  have  nevertheless  agreed  to  remit  at 
par  for  checks  drawn  on  themselves  and  sent  to  them  for  col- 
lection by  the  Federal  reserve  bank.  A  pigeon  hole  is  provided  in 
the  rack  for  each  non-member  institution  just  as  though  it  were 
a  member  bank. 

Checks  on  non-member  state  banks  may  be  collected  in 
several  ways.  First  an  agreement  is  made  between  the  Federal 
reserve  bank  and  the  state  institution  that  items  drawn  on  the 
state  bank  will  be  forwarded  directly  by  the  Federal  reserve 
bank  and  that  the  state  bank  will  immediately  remit  by  draft 
on  its  Philadelphia  or  New  York  correspondent  (preferably 
Philadelphia)  or  ship  currency  at  the  expense  of  the  Federal 
reserve  bank.  A  second  method  is  for  the  Federal  reserve  bank 
to  forward  items  to  one  or  more  member  banks  in  the  same  city, 
which  have  previously  agreed  to  put  them  through  the  local 
clearing  house  or  have  them  collected  by  runners.  Where  this 
arrangement  prevails  the  Federal  reserve  bank  handles  the  items 
as  if  drawn  on  the  member  bank  to  which  they  are  forwarded. 
The  officials  of  the  Federal  reserve  bank  personally  make  these 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  43 

arrangements  and  succeed  in  doing  so  by  explaining  the  advant- 
age of  par  collections.  This  puts  the  state  bank  checks  on  the 
same  basis  as  checks  drawn  on  naHonal  banks.  Where  the 
state  banks  have  agreed  to  the  conditions  no  further  trouble  has 
arisen. 

In  Federal  reserve  districts  Nos.  1,  2  and  12, — in  other  words, 
the  territory  allotted  to  the  Federal  reserve  banks  of  Boston, 
New  York  and  San  Francisco  respectively, — the  reserve  banks 
accept  checks  for  credit  and  collection  drawn  on  any  bank  in  the 
district,  regardless  of  whether  the  bank  has  agreed  or  refused 
to  remit  for  such  checks  at  par.  Wherever  the  non-member 
bank  has  agreed  to  remit  at  par,  the  checks  are  handled  in  the 
ordinary  manner  heretofore  described.  Checks  drawn  on  insti- 
tutions in  these  districts,  which  have  not  agreed  to  remit  at  par 
are  collected  through  member  banks  located  in  the  same  town, 
which  have  agreed  to  assume  this  work,  or  through  the  express 
companies. 

Criticism  has  arisen  in  some  quarters  concerning  the  practice 
of  the  Federal  reserve  banks  accepting  checks  for  collection  on 
non-member  banks  which  have  agreed  to  remit  at  par.  Objec- 
tion is  made  on  the  ground  that  while  member  banks  are  required 
to  keep  a  deposit  with  the  Federal  reserve  bank  which,  to  a 
degree,  safeguards  the  payment  of  checks  in  the  process  of  col- 
lection, yet  in  the  case  of  non -member  institutions,  there  is  no 
such  balance  and  consequently  no  safeguard  of  this  character. 
It  is  further  contended  that  this  opens  up  a  valuable  facility  to 
a  non-member  institution  which  it  can  enjoy  without  in  any  way 
supporting  the  Federal  reserve  system.  As  opposed  to  the  fore- 
going contentions  it  is  pointed  out  that  the  Federal  reserve  bank 
merely  acts  as  the  agent  for  the  remitting  member  bank  and 
that  anything  which  increases  the  ease  of  collecting  checks  to  a 
member  bank  is  of  advantage  to  it  and  to  all  member  banks  in 
the  system.  The  further  argument  is  advanced  that  many 
state  banks  are  so  small  that  a  radical  reorganization  will  be 
necessary  to  enable  them  to  meet  the  minimum  capital  require- 
ments of  the  Federal  Reserve  Act. 

Among  the  amendments  which  were  introduced  in  Congress 
at  the  suggestion  of  the  Federal  Reserve  Board  in  January,  1917, 


44  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

and  which  were  reintroduced  shortly  after  the  opening  of  the 
"war  session"  in  April  of  the  same  year,  was  one  proposing  a 
revision  of  that  part  of  Section  13  dealing  with  the  matter  of 
clearings  and  collections.  The  changes  proposed  were,  first, 
the  addition  of  a  phrase  enabling  a  Federal  reserve  bank  to 
handle  for  collection  maturing  notes  and  bills,  payable  within 
its  district.  In  addition,  the  following  clauses  are  added:  "or 
solely  for  the  purposes  of  exchange  or  of  collection,  a  Federal 
reserve  bank  may  receive  from  any  non-member  bank  or  trust 
company  deposits  of  current  funds  in  lawful  money,  national- 
bank  notes.  Federal  reserve  notes,  checks  and  drafts  payable 
upon  presentation,  or  maturing  notes  and  bills:  Provided, 
Such  non-member  bank  or  trust  company  maintains  with  the 
Federal  reserve  bank  of  its  district  a  balance  in  an  amount  to  be 
determined  by  the  Federal  Reserve  Board  under  such  rules  and 
regulations  as  it  may  prescribe." 

In  explanation  of  the  action  of  the  Board  in  recommending 
the  foregoing  above  amendment,  the  following  statement 
appears  in  the  Federal  Reserve  Bulletin  for  March  1917. 

"it  is  contemplated  that  the  compensating  balances  which  non-member 
banks  participating  in  the  clearing  plan  will  be  required  to  keep  with  Federal 
Reserve  Banks  will  be  sufficiently  large  to  protect  member  banks  and  justify 
Federal  Reserve  Banks  in  undertaking  the  service.  Any  clearing  and  collec- 
tion plan  to  be  effective  must  be  so  comprehensive  as  to  include  all  checks. 
At  present  the  par  lists  of  the  Federal  Reserve  Banks  include  the  names  of 
banks  checks  on  which  can  be  collected  in  any  circumstances  at  a  minimum 
of  time  and  expense,  but  do  not  embrace  a  large  number  of  towns  in  every 
State  where  there  are  no  member  banks;  and  in  order  to  make  collections  on 
such  points  many  banks  are  obliged  to  maintain  accounts  in  addition  to  their 
reserve  accounts  with  the  Federal  Reserve  Banks.  A  necessary  factor  in  any 
successful  clearing  plan  is  the  offset  whereby  balances  only  require  settlement 
instead  of  the  total  volume  of  transactions.  As  long  as  the  clearing  system 
does  not  embrace  all  of  banks,  this  offset  is  lost  in  a  corresponding  degree  and 
the  value  of  the  system  diminished  in  proportion." 

It  should  be  emphasized  that  if  the  foregoing  amendment  is 
enacted  into  law,  which  seems  likely  in  view  of  its  endorsement 
by   the    administration,   it   will   be   possible   for   non-member 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  45 

banks  to  secure  reciprocal  advantages  from  the  Federal  reserve 
collection  system;  that  is  to  say,  to  have  their  checks  pass  at 
par  throughout  the  district  and  furthermore,  to  be  able  themselves 
to  use  the  Federal  reserve  banks  for  the  collection  of  out-of- 
town  checks  which  they  have  received  from  their  depositors. 
It  should  be  kept  in  mind  that  this  arrangement  does  not 
in  itself  confer  membership  upon  state  banks,  and  will  not  allow 
them  the  privilege  of  rediscount  or  other  protection  afforded  to 
full  members  of  the  Federal  reserve  system.  The  arrangement 
is  made  for  the  convenience  of  the  public  and  incidentally  for 
the  benefit  of  the  member  banks. 

'* Eastern j"  "Other  Reserve  Districts''  and  "Divisions." — ^As 
previously  explained  all  checks  sent  to  the  Federal  Reserve 
Bank  of  Philadelphia  for  deposit  and  collection  and  drawn  on 
institutions  situated  outside  of  the  Federal  reserve  district  No.  3 
are  classified  into  two  divisions — "Eastern"  comprising  Federal 
Reserve  Districts  No.  1  and  No.  2,  consisting  of  New  England, 
the  state  of  New  York,  and  the  northern  portion  of  New  Jersey — 
and  "Other  Reserve  Districts"  which  includes  the  entire  country, 
with  the  exception  of  Federal  Reserve  Districts,  No.  1,  2  and  3. 

Checks  on  banks  included  in  the  eastern  division  are  resorted 
according  to  whether  the  member  bank  is  situated  in  the  territory 
of  the  Boston  Federal  Reserve  Bank  or  the  New  York  Federal 
Reserve  Bank,  the  pigeon  holes  being  respectively  denominated 
"The  Boston  Federal  Reserve  Bank"  and  "The  New  York 
Federal  Reserve  Bank."  After  this  separation  has  been  accom- 
plished, the  checks  for  each  reserve  bank  are  further  sub-divided 
according  to  the  period  of  time  which  must  elapse  under  the 
time  schedule,  before  the  credit  therefor  will  be  available.  For 
example,  checks  of  the  New  York  Federal  reserve  bank  are  sub- 
divided into  two  groups — first,  those  drawn  on  the  Federal 
Reserve  Bank  of  New  York,  or  upon  other  banks  situated  in 
New  York  City;  second,  those  drawn  upon  banks  situated 
outside  of  New  York  City. 

The  arrangement  now  prevailing  in  the  Philadelphia  District, 
is,  in  substance,  that  checks  remitted  by  banks  situated  outside 
of  Philadelphia  to  the  Federal  reserve  bank  for  credit  and  col- 
lection, drawn  upon  banks  situated  in  New  York  City,  will  be 


A6  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

entitled  to  immediate  credit.  When  such  checks  are  remitted, 
however,  by  banks  situated  in  Philadelphia,  credit  will  be  given 
one  day  after  receipt.  This  practice  follows  in  the  main  the 
custom  inaugurated  by  the  country  collection  department  of  the 
Boston  Cleaiing  House  prior  to  the  creation  of  the  Federal 
reserve  system.  It  permits  the  country  banks  to  remit  for 
checks  sent  to  them  for  collection  by  their  Federal  reserve  bank 
either  in  New  York  or  Philadelphia  exchange.  It  is  in  reality  a 
concession  designed  to  increase  the  attractiveness  of  the  collec- 
tion system  to  country  banks.  Checks  drawn  on  banks  situated 
in  New  England  are  classified  into  two  groups;  those  payable 
in  Boston,  for  which  credit  is  given  one  business  day  after  receipt; 
and  those  drawn  on  banks  in  any  other  part  of  New  England, 
for  which  credit  is  available  to  the  depositing  member  bank 
two  business  days  after  receipt  by  the  Philadelphia  Federal 
Reserve    Bank. 

All  checks  drawn  on  banks  situated  in  the  New  York  Federal 
Reserve  District  are  sent  by  the  Federal  Reserve  Bank  of  Phila- 
delphia to  its  sister  institution  in  New  York  for  credit  and 
collection.  A  similar  course  of  action  is  followed  with  checks 
drawn  on  banks  situated  in  the  Boston  district,  also  with  checks 
district.  This  is  the  fundamental  principle  underlying  inter- 
drawn  on  banks  situated  in  any  other  Federal  reserve 
district  collections.  Through  the  use  of  such  a  system  the  col- 
lection machinery  of  any  particular  Federal  reserve  bank  is 
much  simplified.  Any  Federal  reserve  bank  is  confined  in  its 
activities  to  dealings  with  its  member  banks;  with  non-member 
state  banks  situated  within  its  district,  which  have  agreed  to 
remit  at  par;  with  the  clearing  house  of  the  city  in  which  the 
reserve  bank  is  situated,  and  with  each  of  the  other  eleven 
Federal  reserve  banks.  The  eleven  accounts  with  the  other 
Federal  reserve  banks  may  be  likened  to  great  trunk  lines  over 
which  collections  can  be  made  with  thousands  of  other  banks 
situated  throughout  the  United  States,  without  any  duplication 
of  machinery  or  confusion  of  work. 

Because  of  the  differences  in  the  time  at  which  the  proceeds  of 
checks  drawn  on  banks  situated  in  different  parts  of  the  Federal 
reserve  districts  are  available,  two  outgoing  letters  are  used  in 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 


47 


sending  checks  for  collection  to  each  reserve  bank.  The  first 
accompanies  city  items,  that  is  checks  drawn  on  banks  situated  in 
the  same  city  as  the  reserve  bank;  the  second  accompanying 
country  items  or  checks  drawn  on  banks  situated  in  any  other 
part  of  the  reserve  district.  Each  item  is  described  as  it  is 
listed  by  using  the  universal  numerical  system  symbol  or  by 
inserting  the  name  of  the  bank.  The  form  of  these  letters  are 
as  follows: 


FORM  55  25m 
3-4 


FEDERAL  RESERVE  BANK 
OF  PHILADELPHIA 


City  Items 
3-4 


TELEGRAPH  NON-PAYMENTS  OF  ITEMS  $500  OR  OVER. 
PROTEST  ALL  ITEMS    OVER  $10  EXCEPT  THOSE  BEARING 

INSTRUCTIONS  {  on  theur  face  this  stamp  (n.  p.  3-4)  or  a  similar 

STAMP    containing    THE    TRANSIT    NUMBER    OF    A 
preceding  BANK  ENDORSER. 


FORM  56  75m 
3-4 

INSTRUCTIONS 


FEDERAL  RESERVE  BANK 
OF  PHILADELPHIA 


Country  Items 
3-4 


TELEGRAPH  NON-PAYMENTS  OF  ITEMS  $500  OR  OVER. 

PROTEST  ALL  ITEMS  OVER  $10  EXCEPT  THOSE  BEARING 
ON  THEIR  FACE  THIS  STAMP  (n.  P.  3-4)  OR  A  SIMtLAR 
STAMP  CONTAINING  THE  TRANSIT  NUMBER  OF  A 
PRECEDING   BANK   ENDORSER. 


48 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 


Report  By  the  Transit  Department  to  the  Bookkeeping  Depart 
ment. — ^Viewed  in  its  largest  aspect,  the  primary  function  of  the 
transit  department  of  a  bank  is  to  convert  into  cash  checks  and 
other  credit  items  passing  through  its  hands.  The  results  of  the 
work  of  the  transit  department  are  shown  by  the  creation  of 
credits  and  debits  to  the  accounts  of  the  bank's  depositors.  It 
is  not  the  purpose  of  this  study  to  follow  in  detail  the  bookkeeping 
system  of  the  Federal  reserve  bank,  but  it  is  necessary,  how- 
ever, to  indicate  the  manner  in  which  the  transit  department 
reports  to  the  bookkeeping  department  the  results  of  its  operation, 
furnishing  the  basis  for  the  entries  to  the  several  accounts  of  the 
member  banks  and  of  the  other  institutions  that  are  depositors 
with  the  Federal  reserve  bank.  After  the  batch  sheets  have  been 
settled,  the  incoming  cash  letters  are  sent  by  the  transit  depart- 
ment to  the  bookkeeping  department  where  the  total  of  each 
letter  is  credited  to  the  account  of  the  depositing  bank.  After 
the  total  has  been  posted,  the  letters  are  acknowledged,  use  being 
made  of  the  following  form: 


FEDERAL  RESERVE  BANK  OF  PHILADELPHIA 

Date 

We  credit  your  account 


Your  favor  of  the instant 

has  been  received  with  enclosures  as 
stated. 

F-29 


F.  M.  Hardt,  Cashier. 


Charges  against  the  accounts  of  member  banks,  as  has  been 
said,  are  made  from  the  duplicates  of  the  outgoing  cash  letters, 
which  are  sent  by  the  manager  of  the  transit  department  to  the 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  49 

bookkeeping  department  after  the  work  of  the  former  depart- 
ment has  been  completed  and  proved.  On  the  second  day  after 
the  checks  have  been  forwarded  or,  in  other  words,  two  days  after 
the  date  of  the  outgoing  cash  letter,  the  bookkeepers  will  charge 
the  proper  accounts  with  the  amount  of  the  outgoing  letters. 
In  the  interim,  the  duplicate  letters  are  held  separately.  After 
the  proper  entries  have  been  made,  the  duplicate  letters  are 
returned  to  the  transit  department  for  permanent  file. 

In  case  the  remittance  of  the  bank  is  in  the  form  of  cash,  the 
package  does  not  go  to  the  transit  department  but  directly  to 
the  receiving  teller,  who  acknowledges  its  receipt  by  properly 
filling  out  and  mailing  the  following  acknowledgement  letter: 

FORM  33 

FEDERAL  RESERVE  BANK  OF  PHILADELPHIA 


Date, 


We  beg  to  acknowledge  receipt  of  your 
(Shipment  of  Cash)  and  credit,  subject  to 


count |. 

Deposit  through  No $. 


TeUer. 


F.  M.  Hardt,  Cashier, 


General  Summary. — ^The  operations  of  the  Federal  reserve 
transit  department  may  be  summarized  as  follows: 

First :  The  incoming  mail  is  sorted  into  five  divisions  depend- 
ing upon  point  of  origin,  i.  e. 

(1)  Delaware  and  New  Jersey,  Pennsylvania  A-D. 

(2)  Pennsylvania  E-0. 

(3)  Pennsylvania  P-Z. 

(4)  Other  reserve  banks. 

(5)  Non-member  state  banks. 

Second :  The  mail  is  opened  and  checked. 
Third :  The  contents  of  a  package  or  packages  are  batched 
and  then  sorted  into  eleven  transit  divisions. 


so  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

(1)  Clearing  House  Item. 

(2)  Run. 

(3)  Federal  Reserve  Bank  of  Philadelphia. 

(4)  Return  items. 

(5)  Delaware  and  New  Jersey. 

(6)  Pennsylvania  A-D. 

(7)  Pennsylvania  E-O. 

(8)  Pennsylvania  P-Z. 

(9)  Other  Philadelphia. 

(10)  Eastern  (New  York  and  New  England). 

(11)  Other  reserve  districts. 

Fourth:  Items  are  listed  under  proper  headings  on  a  numbered 
batch  sheet. 

Fifth:  Make-up  of  each  batch  sheet  is  examined  by  the 
settling  clerk. 

Sixth:  The  batch  sheets  are  kept  by  the  settlement  clerk, 
who  after  assembling  all  of  them  makes  up  a  recap  sheet. 

Seventh:  A  settlement  sheet  is  made  up  from  the  recap 
sheet  and  additional  data  received  from  the  tellers  in  the  Federal 
reserve  bank  is  also  included. 

Eighth:  The  checks  are  assembled  and  then  taken  to  the 
proper  divisions  where  they  are  racked. 

Ninth:  Outgoing  letters  addressed  to  the  banks  on  which 
checks  are  drawn,  are  made  up. 

Tenth:  Each  division  settles  by  proving  that  outgoing  letter 
totals  equal  the  incoming  items  as  shown  by  the  settlement  sheet. 

Eleventh:  Checks  with  letters  are  put  in  envelopes,  sealed, 
stamped  and  mailed. 

Twelfth :  The  incoming  letters  are  acknowledged ;  then  posted 
to  the  proper  accounts  by  the  bookkeepers,  and  returned  to  the 
transit  department  for  permanent  records. 

Variations  in  Transit  Methods  of  the  Federal  Reserve  Banks, — 
Although  the  plan  of  the  Philadelphia  Reserve  Bank  is  typical, 
it  varies  in  some  details  from  the  methods  employed  in  other 
districts.  The  Federal  Reserve  Bank  of  Boston  requires  that 
the  depositing  bank  arrange  its  cash  letter  not  only  to  conform 
ot  the  time  schedule,  as  was  explained  in  the  description  of  the 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  51 

Philadelphia  Bank,  but  in  addition  that  all  checks  drawn  on 
the  same  bank  be  grouped  and  handled  as  one  amount.  That 
is,  if  several  checks  on  the  same  institution  are  included  in  a 
letter,  a  rubber  band  is  put  around  them  and  a  list  of  these 
checks  and  the  total  thereof  is  included.  This  saves  the  transit 
department  a  great  deal  of  work,  for  it  does  not  have  to  sort 
each  check  in  the  deposit,  but  handles  them  in  groups.  This 
facilitates  the  work  in  handling  large  deposits,  particularly 
those  of  the  Boston  banks,  because  in  these  deposits  are  included 
many  items  which  are  drawn  on  the  same  bank  in  the  district. 
In  levying  the  service  charge  against  the  depositing  banks, 
the  Federal  Reserve  Bank  of  Boston  assesses  the  depositing 
bank  nine-tenths  of  one  cent  for  each  individual  check  enclosed. 
It  does  not  base  the  charge  upon  the  number  of  groups  enclosed. 
The  old  Boston  clearing  house  plan  differs  from  the  Boston 
reserve  bank's  plan  in  that  the  latter  is  reciprocal.  Under  the 
old  system  New  England  country  banks  were  largely  compelled 
to  use  the  Boston  banks  in  the  collection  of  checks  drawn  on 
other  New  England  banks,  because  in  no  other  way  cou'd  the 
remarkably  efficient  and  economical  service  of  the  country  col- 
lection department  of  the  Boston  Clearing  House  be  enjoyed. 
This  tremendously  emphasized  the  importance  and  value  of  the 
Boston  banks  as  reserve  agents.  Now  the  country  banks  can 
secure  the  same  service  through  the  Federal  reserve  bank  without 
dealing  with  the  Boston  city  banks.  The  latter  are  still  used 
because  of  inertia,  or  because  the  country  bank  can  thereby 
avoid  paying  the  service  charge  itself — saddling  this  expense 
upon  the  Boston  city  bank,  which  in  turn  is  reimbursed  out  of  the 
profits  which  it  makes  on  the  country  bank's  balance.  At 
present  the  country  bank  is  not  allowed  to  carry  more  than  one- 
sixth  of  its  required  reserve  of  12  per  cent  on  deposit  with  the 
Boston  banks.  This  2  per  cent  reserve,  if  carried  in  the  Federal 
reserve  bank  in  addition  to  the  5  per  cent  which  must  at  this 
time  be  there  carried  on  deposit  would  earn  nothing  for  the 
country  bank.  If  carried  with  the  old  reserve  agent  it  earns 
2  per  cent  interest  per  annum  for  the  country  bank,  and 
in  many  cases  enables  the  latter  to  avoid  paying  directly 
the   collection    charges.     Thus    it    follows    that    the    country 


52  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

bank's  deposit  in  the  Boston  bank  serves  a  double  purpose  and 
in  Boston  as  elsewhere,  the  larger  part  of  the  collection  items 
continue  to  come  to  the  Federal  reserve  bank  through  the  city 
banks. 

After  November  1917,  at  the  latest,  the  country  banks  will  be 
faced  with  the  alternative  of  continuing  to  carry  a  balance  with 
their  former  reserve  agents  for  the  sole  purpose  of  avoiding  the 
direct  payment  of  the  service  charge  and  in  return  for  such 
advice  and  other  service  as  the  old  reserve  agents  have  hereto- 
fore performed  for  them.  Such  balances  cannot  thereafter  be 
counted  as  a  part  of  the  country  bank's  legal  reserve.  It  seems 
self-evident  that  the  city  bank  will  not  assume  service  charges 
and  other  expenses  in  a  greater  amount  than  it  can  earn  from 
the  use  of  the  country  bank's  balance.  Many  country  bankers 
may  prefer  to  pay  their  service  charges  indirectly  through  the 
maintenance  of  a  compensating  balance,  but  in  spite  of  the 
well  known  preference  of  all  men  for  indirect  taxation  or  charges 
and  of  the  equally  well  known  conservatism  and  unwillingness 
of  the  banker  to  make  changes,  it  appears  likely  that  with  the 
passage  of  the  old  system  of  reserve  agents  there  will  be  a  de- 
crease in  the  volume  of  checks  which  will  go  through  the  Boston 
banks.  In  consequence  it  will  probably  be  necessary  to  a  con- 
stantly increasing  degree,  for  the  Federal  Reserve  Bank  of 
Boston  to  handle  more  individual  items. 

The  plan  followed  by  the  Dallas  bank  differs  from  the  others, 
for  while  deposits  of  items  are  credited  immediately,  the 
funds  are  not  available  until  the  remittances  have  actually  been 
received.  No  time  schedule  is  followed,  but  when  remittances 
are  received  by  the  reserve  bank,  the  credits  established  by  the 
corresponding  deposit  of  the  bank  which  sent  in  the  items  are 
released  for  use.  Under  this  arrangement  the  depositing  bank 
does  not  know  definitely  when  its  credits  will  be  available. 

The  Gold  Settlement  Fund. — ^Section  16  of  the  Federal  Reserve 
Act  directs  the  Federal  Reserve  Board  to  formulate  regulations 
governing  the  transfer  of  funds  and  charges  therefor  among  the 
Federal  reserve  banks  and  their  branches.  It  further  gives  to 
the  Board  the  discretionary  right  to  "exercise  the  functions  of  a 
clearing  house  for  such  Federal  reserve  banks."    Acting  under 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  53 

this  authority,  the  Federal  Reserve  Bocird  by  Regulation  I, 
issued  in  June  1915,  established  the  "Gold  Settlement  Fund." 
Each  Federal  reserve  bank  was  required  to  deposit  for  credit 
to  the  account  of  the  Gold  Settlement  Fund  $1,000,000  in  gold, 
gold  certificates  or  gold  order  certificates  and  in  addition  an 
amount  at  least  equal  to  its  net  indebtedness  due  to  all  the 
Federal  reserve  banks  at  that  time.  The  regulation  further 
provided  that  each  Federal  reserve  bank  should  always  maintain 
a  balance  in  the  fund  of  not  less  than  $1,000,000.  However, 
excess  balances  may,  at  the  convenience  of  each  Federal  reserve 
bank,  remain  on  deposit  in  the  fund,  and  as  the  balance  on 
deposit  in  the  Gold  Settlement  Fund  may  be  counted  as  part  of 
the  Federal  reserve  bank's  reserve  there  is  no  object  in  keeping 
only  the  minimum  on  deposit.  The  Treasury  Department 
has  provided  the  Reserve  Board  with  a  safe  in  one  of  the  Treasury 
vaults  to  accommodate  these  deposits  of  gold  and  certificates. 
The  combination  of  this  safe  is  controlled  by  two  persons  repre- 
senting the  Board  although  two  persons  designated  by  the 
Secretary  of  the  Treasury  must  be  present  each  time  the  safe 
is  opened. 

Each  Federal  reserve  bank  maintains  on  its  books  an  account 
with  every  other  Federal  reserve  bank.  To  these  accounts  items 
sent  to  the  other  Federal  reserve  banks  for  collection  are  charged 
or  debited,  as  also  are  the  payments  and  transfers  of  moneys 
which  have  been  made  for  the  accounts  of  each  of  the  other 
Federal  reserve  banks.  Each  account  is  credited  with  the 
proceeds  of  items  that  have  been  received  from  the  other  reserve 
banks  after  they  have  been  actually  collected,  and  also  for 
payments  and  transfers  of  funds  which  have  been  made  to  it 
for  the  account  of  each  of  the  other  Federal  reserve  banks.  In 
addition,  the  Federal  reserve  bank  carries  on  its  books  an  account 
entitled  "Gold  Settlement  Fund"  to  which  is  charged  the 
amounts  placed  to  the  credit  of  the  bank  upon  the  books  of  the 
"Gold  Settlement  Fund"  and  maintained  on  the  books  of  the 
Federal  Reserve  Board  in  Washington,  and  to  which  is  credited 
all  payments  made  through  the  Gold  Settlement  Fund,  either 
through  the  weekly  settlement  or  by  mail  or  telegraphic  transfers. 

At  the  close  of  business  on  Wednesday  afternoon,  the  Federal 


54        THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

reserve  banks  telegraph  to  the  Federal  Reserve  Board  the 
amounts  in  even  thousands  of  dollars  "due  to"  or  the  total 
credits  in  the  account  of  each  of  the  other  Federal  reserve  banks 
at  that  time.  The  total  debits  are  not  reported  nor  is  the  net 
balance  of  the  account  reported.  The  "due  to"  items  reported 
by  the  other  Federal  reserve  banks  will  act  as  the  debits,  when 
reported  to  the  Board  after  the  settlement.  Should  Wednesday 
be  a  holiday  the  telegram  is  dispatched  on  Tuesday.  All  tele- 
grams are  confirmed  by  a  mailed  report. 

On  Thursday  morning  the  Federal  Reserve  Board  assembles 
the  figures  on  a  sheet  known  as  "the  checker  board,"  which  has 
the  names  of  the  Federal  reserve  banks  at  the  head  of  twelve 
columns,  and  also  at  the  left-hand  margin.  The  form  of  "the 
checker  board"  is  shown  on  page  55. 

The  amounts  reported  "due  to"  other  Federal  reserve  banks 
are  listed  in  the  proper  columns,  under  the  names  of  the  other 
banks  to  which  the  amounts  are  due;  the  total  "due  to"  is 
entered  at  the  right  margin.  Thus  each  horizontal  column  shows 
the  amounts  which  the  Federal  reserve  bank  named  in  the  left 
hand  column  owes  to  each  other  Federal  reserve  bank  listed  at 
the  head  of  the  vertical  columns,  and  also  the  aggregate  due 
to  all  other  Federal  reserve  banks  as  entered  on  the  right-hand 
margin.  When  the  contents  of  all  the  telegraims  have  been 
entered  and  the  columns  of  the  "checker  board"  totaled  both 
horizontally  and  vertically,  each  vertical  column  shows  the 
amounts  due  to  the  bank  listed  at  the  head  of  the  column  from 
each  of  the  other  eleven  Federal  reserve  banks,  and  the  aggre- 
gate due  to  the  bank  is  shown  by  the  total  of  the  vertical  column. 
In  other  words  the  vertical  column  shows  the  aggregate  amount 
"due  from "  the  other  banks  to  the  bank  listed  at  the  head  of  the 
column.  The  Reserve  Board  then  charges  each  bank's  account 
with  the  total  of  the  horizontal  column  opposite  its  name,  and 
credits  each  bank's  account  with  the  total  due  it  from  other 
Federal  reserve  banks  as  shown  by  the  total  of  the  vertical  column 
bearing  the  name  of  that  bank. 

The  Board  telegraphs  to  each  reserve  bank,  confirming  the 
telegram  by  mail,  giving  the  "due  to"  amounts  which  other 
Federal  reserve  banks  reported,  that  is  to  say,  the  details  of  the 


7!^ 

i 

i 

1 

1 

1 

c 

s 

O 

5 
a 

< 

1 

0 

2 

1 

1 

1 

1 
1 

1 

1 

1 

o 

1^ 

.2 

00 

.2 

g 

6 

d 

1 
1 

1 

56  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

vertical  columns,  and  also  the  net  amount  which  the  pa-ticular 
bank  is  debtor  or  creditor  in  the  weekly  settlement  of  clearings. 
This  is  determined  by  ascertaining  the  difference  between 
totals  "due  to"  and  "due  from"  as  shown  by  the  checker- 
board. The  instructions  of  the  Federal  Reserve  Board  are  that 
"Each  bank  will  then  debit  the  'Due  to'  Federal  reserve  bank's 
accounts  and  credit  the  settlement  fund,  and  will  credit  the 
'due  from'  Federal  reserve  banks'  accounts  and  charge  the 
Settlement  Fund." 

As  previously  stated  figures  are  reported  in  even  thousands  so 
inter-bank  accounts  are  not  entirely  settled  each  week.  Also 
only  the  credits  or  amounts  "due  to"  other  Federal  reserve 
banks  are  reported  by  each  bank  to  the  Board,  which  renders  a 
weekly  settlement  of  accounts  impossible.  The  reserve  banks 
reconcile  their  accounts  monthly.  In  these  reconcilements  items 
in  transit,  and  miscellaneous  items  can  be  readily  checked  up 
and  accounted  for. 

Up  to  this  point  only  that  portion  of  the  activities  of  the  Gold 
Settlement  Fund  which  relate  to  the  periodical  settlement  of 
balances  between  the  several  Federal  reserve  banks  arising  out 
of  collection  operations  has  been  considered.  The  Fund  serves 
a  second  very  important  purpose.  Through  it,  the  Federal 
reserve  banks  are  enabled  to  effect  the  transfer  by  telegraph  of 
money  from  one  to  the  other.  The  process,  in  brief,  consists  of 
a  telegraphic  order,  in  code,  directed  by  one  Federal  reserve 
bank  to  the  Federal  Reserve  Board  authorizing  the  latter  to 
credit  a  specified  amount  to  the  account  of  a  designated  Federal 
reserve  bank.  Upon  the  receipt  of  such  a  telegram,  the  Board 
will  wire  to  the  Federal  reserve  bank  to  which  the  transfer  is  to 
be  made  that  it  has  placed  the  specified  amount  to  the  credit  of 
that  institution.  At  the  same  time,  the  Board  will,  by  appro- 
priate entries,  debit  the  account  of  the  one  bank  and  credit  that 
of  the  second  To  all  practical  intents  and  purposes,  the  money, 
which  in  reality  is  gold,  is  just  as  useful  to  the  second  Federal 
reserve  bank  in  the  Gold  Settlement  Fund  as  it  would  be  in  its 
own  vaults  at  its  home  office  for  the  regulations  allow  the  Federal 
reserve  bank  to  count  balances  in  the  Gold  Settlement  Fund 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  57 

as  a  part  of  its  reserve  or  to  use  such  balances  as  the  basis  of 
note  issue.* 

The  tremendous  value  of  the  Gold  Settlement  Fund  to  the 
reserve  banks  has  been  evident  from  the  outset.  It  has  operated 
with  remarkable  economy  and  efficiency.  The  results  of  the 
first  year  of  operation  were  well  described  by  the  Board  in  the 
Federal  Reserve  Bulletin  for  June,  1916: 

"Since  the  gold-settlement  fund  has  now  been  in  operation  for  one  year, 
it  may  be  interesting  to  review  briefly  the  more  important  features  of  its 
operations.  The  primary  object  for  which  the  fund  was  established  was  the 
settlement  of  obligations  arising  from  the  12  Federal  Reserve  Banks,  and  the 
extent  of  its  operations  of  this  kind  may  be  measured  by  the  total  amount  of 
weekly  clearings  and  transfers.  These  have  amounted  since  May  20,  1915, 
to  $2,178,240,000,  almost  half  of  this  amount  having  been  handled  since  the 
beginning  of  the  present  year.  The  weekly  settlements  and  transfers  which 
at  first  averaged  approximately  $20,000,000,  have  steadily  increased.  For 
each  of  the  last  four  weeks  they  exceeded  $60,000,000  and  for  the  week  ending 
May  25  were  close  to  $80,000,000.  It  is  expected  that  with  the  more  active 
clearing  operations  by  Federal  Reserve  Banks,  which  are  to  begin  July  15, 
the  amounts  settled  each  week  will  in  all  probability  be  considerably  increased. 

"The  most  important  function  of  the  fund  has  been  to  obviate  unnecessary 
shipments  of  gold  currency  between  the  various  sections  of  the  country.  The 
first  step  in  such  a  process  is,  of  course,  to  oflFset  and  cancel  by  clearing  as 
many  obligations  and  of  as  large  amount  as  possible,  and  this  the  Federal 
Reserve  Banks  have  accomplished  and  will  to  a  still  greater  degree  accomplish 
through  the  gold  settlement  fund.  The  result  of  the  clearing  process  thus 
far  has  been  that  for  $2,178,240,000  of  obligations  settled,  there  has  remained 
only  a  net  balance  of  $144,288,000,  or  6.62  per  cent,  to  be  paid  by  transfer  of 
ownership  of  the  gold  certificates  held.  Not  only  has  the  net  amount  necessary 
to  be  covered  by  payment  of  gold  or  its  equivalent  been  minimized  by  the 
clearing  operation  of  the  fund,  but  the  actual  shipment  of  even  the  relatively 
small  balance  has  been  entirely  avoided.  With  the  aid  and  co-operation  of 
the  Treasury  Department,  it  has  been  possible  to  have  any  Federal  Reserve 
Bank  becoming  debtor  to  another  bank  merely  make  deposit  with  the  nearest 


*  Mention  should  be  made  in  passing  of  the  fact  that  in  addition  to  the 
Gold  Settlement  Fund  operations  above  described,  the  Federal  Reserve 
Board  has  created  a  Gold  Settlement  Fund  for  Federal  reserve  agents,  which 
is  used  in  connection  with  the  operations  of  issuing,  securing  and  retiring 
Federal  reserve  notes.  This  latter  fund  has  no  direct  connection  with  the 
subject  matter  of  this  study. 


58        THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

Sub-treasury  (six  Federal  Reserve  cities  have  sub-treasuries),  and  gold  cer- 
tificates have  been  issued  at  Washington  payable  to  the  order  of  the  Federal 
Reserve  Board,  to  be  held  in  the  gold  settlement  fund.  On  the  other  hand, 
whenever  a  Federal  Bank  has  need  of  funds  to  its  credit,  the  operation  has 
been  reversed  and  payment  made  by  the  nearest  sub-treasury.  Such  with- 
drawals have  been  relatively  small  in  volume  and  the  major  portion  of  the 
gold  paid  into  the  fund  has  been  permitted  to  remain. 

Under  the  abnormal  conditions  prevalent  during  the  past  year,  seasonal 
movements  of  currency  in  the  United  States  have  been  much  deranged  and 
the  usual  ebb  and  flow  has  not  taken  place.  Large  imports  of  gold  have 
reached  New  York  City,  very  substantial  portions  of  which  had  as  their 
ultimate  destination  the  various  industrial  and  agricultural  centers,  from  which 
had  gone  the  exports  of  commodities.  Through  this  movement  and  through 
the  call  on  New  York  City  banks  for  funds  to  make  payments  due  from 
member  banks  throughout  the  country  on  account  of  installments  of  reserve 
deposits  with  the  Federal  Reserve  Banks,  a  condition  was  created  which, 
without  the  gold  settlement  fund,  would  undoubtedly  have  occasioned  large 
and  expensive  domestic  gold  shipments  from  New  York.  Through  the  opera- 
tion of  the  gold  settlement  fund  the  same  end  has  been  accomplished  at  almost 
negligible  expense  by  the  Federal  Reserve  Bank  of  New  York  depositing  gold 
with  the  Sub-treasury  for  credit  in  the  gold  settlement  fund  and  transferring 
the  credit  thus  acquired  to  other  Federal  Reserve  Banks.  During  the  year 
almost  $126,000,000  has  in  this  way  been  transferred  from  New  York  to  other 
centers. 

"An  important  service  rendered  to  Federal  Reserve  Banks,  and  through 
them  to  member  banks,  has  been  the  making  of  deposits  with  the  Treasurer 
of  the  United  States  for  various  purposes,  particularly  for  the  release  and 
transfer  to  Federal  Reserve  Banks  of  United  States  bonds  securing  national 
bank-note  circulation." 

In  its  annual  report  for  the  year  1916,  the  Federal  Reserve 
Board  presents  additional  data  concerning  the  operations  of  tne 
Gold  Settlement  Fund.  The  total  volume  of  business  cleared 
during  the  year  1916  was  stated  to  have  been  about  $5,533,966,- 
000,  handled  at  a  cost  of  $1,343.37,  "being  a  net  cost  of  $.0002 J^ 
per  $1,000  .  .  .  The  net  amount  of  change  of  ownership 
among  the  Federal  reserve  banks  of  gold  held  in  the  Fund  was 
$223,870,000,  and  it  may  be  estimated  conservatively  that  the 
shipment  of  coin  and  currency  to  at  least  this  amount  was  thus 
avoided.     .     .    The  resulting  change  in  ownership  of  gold  was 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  59 

4.0453  per  cent  of  the  total  obligations  settled,  as  compared  with 
8.14  per  cent  in  1915.  There  has  been  a  rapid  and  steady  growth 
in  the  volume  of  transactions  handled  through  the  Gold  Settle- 
ment Fund.  Especially  has  this  been  true  since  July  15,  1916, 
when  the  Federal  reserve  banks  began  active  check  clearing 
and  collecting  operations."  Commenting  further  upon  the 
results  of  operations  of  the  Gold  Settlement  Fund  from  the  date 
of  its  establishment  to  the  close  of  the  year  1916,  the  Federal 
Reserve  Board  stated: 

The  expectation  that  the  operations  of  the  fund  would  make  unnecessary, 
for  the  most  part,  actual  shipments  of  gold  between  Federal  Reserve  Banks, 
has  been  well  justified  by  experience  extending  over  19  months.  No  expense 
for  shipment  of  gold  in  connection  with  the  fund's  operations  has  been  incurred 
other  than  the  charges  on  a  small  number  of  shipments  made  by  banks  not 
located  in  cities  having  sub-treasuries.  The  abnormal  inflow  of  gold  from 
Europe  entering  the  country  at  New  York,  though  destined  in  large  part  for 
interior  points  whose  exports  had  induced  the  gold  movement,  has  influenced 
materially  the  trend  of  the  settlements.  The  Federal  Reserve  Bank  of  New 
York  has  usually  been  debtor  at  the  clearings  and  has  parted  with  gold  during 
the  year  to  the  amount  of  $222,147,000,  and  since  May  20,  1915,  to  the  amount 
of  $303,430,000.  This  movement  has  resulted  in  increased  reserves  held  by 
other  Federal  Reserve  Banks  and  in  increased  holdings  by  Federal  Reserve 
Agents  against  Federal  Reserve  notes  outstanding. 

The  aggregate  deposits  of  the  twelve  Federal  reserve  banks 
in  the  Gold  Settlement  Fund  on  May  4,  1917,  were  $218,910,000; 
in  addition  to  which  $153,570,000  wais  on  deposit  in  the  Federal 
Reserve  Agents'  Fund,  making  an  aggregate  of  $372,480,000 
in  the  hands  of  the  Federal  Reserve  Board. 

Protest  of  State  Banks  Against  Par  Collections. — ^So  long  as  the 
collection  activities  of  the  Federal  reserve  banks  were  upon  a 
voluntary  basis  no  considerable  protest  was  voiced  by  the  state 
banks.  There  is  no  doubt  that  a  large  number  of  the  state  banks 
were  influenced  against  joining  the  reserve  system  by  the  profits 
derived  from  charging  exchange  upon  checks  drawn  on  them- 
selves. Profits  from  this  source  continued  so  long  as  the  banks 
remained  non-members,  and  this  was  of  great  moment  in  a  large 
number  of  cases. 


«0        THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

The  state  banks'  case  against  compulsory  par  collections  has 
been  vigorously  and  fully  presented.  Beginning  with  the  resolu- 
tion of  protest  by  the  Bankers'  Association  of  Texas,  determined 
efforts  have  been  made  to  secure  official  condemnation  of  par 
collections  by  various  bankers'  associations.  A  meeting  of  some 
150  accredited  delegates,  nominally  representing  twenty  state 
bankers'  associations,  was  held  in  St.  Louis  in  June  1916.  It 
was,  as  has  been  aptly  phrased  by  a  sympathetic  state  banker, 
"a  convention  of  protest  and  not  of  deliberation,  for  it  refused  to 
listen  to  Festus  J.  Wade  and  others,  who  undertook  to  argue 
that  there  were  some  merits  in  the  plan."  The  convention 
adopted  resolutions  declaring  the  plan  to  be  "unwise,  unneces- 
sary, economically  unsound  and  in  the  last  analysis  prejudicial 
to  the  best  interest  of  general  business."  Unsuccessful  efforts 
were  made  to  secure  the  passage  of  a  resolution  by  the  Michigan 
Bankers'  Association  condemning  par  collections.  On  the  other 
hand  the  Washington  State  Bankers'  Association  by  resolution^ 
adopted  June  1916,  declared  that  the  plan  for  par  check  col- 
lections "is  an  unnecessary  interference  with  the  usual  methods 
of  banking"  and  "it  is  usurping  one  of  the  necessary  functions 
of  the  member  banks."  The  Virginia  Bankers'  Association, 
by  resolution  adopted  June  24,  1916,  declared  that  compulsory 
par  check  collections  were  "unwise  and  unnecessary  features  of 
the  reserve  act." 

An  effort  was  made  without  success  to  induce  the  American 
Bankers'  Association  to  undertake  or  co-operate  in  legal  pro- 
ceedings attacking  the  constitutionality  of  Sections  13  and  16  of 
the  Federal  Reserve  Act.  The  state  bank  members  of  the 
American  Bankers'  Association,  however,  organized  a  state  bank 
section  of  that  organization.  Movements  to  organize  state 
bankers  into  separate  groups  were  publicly  deprecated  by  the 
Federal  Reserve  Board. 

The  American  Bankers'  Association  at  its  Convention,  held 
in  October,  1916,  adopted  a  resolution  which  set  forth  in  the 
preamble,  among  other  things,  that  "the  so-called  par  collection 
of  checks  is  not  a  feature  necessary  to  the  attainment  of  the 
object  sought  by  the  Federal  Reserve  Act,  and  the  system  of 
collecting  checks  now  in  operation  under  the  law,  as  interpreted 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  61 

and  applied  by  the  Federal  Reserve  Board,  works  serious  hard- 
ships upon  and  leavy  losses  to  thousands  of  country  banks,  and 

"Whereas,  it  is  the  belief  of  the  majority  of  bankers  that  Congress  did  not 
intend  to  deprive  the  banks  of  legitimate  profit,  therefore 

"Be  it  Resolved,  That  the  American  Bankers'  Association,  while  approv- 
ing the  fundamental  principles  of  the  Federal  Reserve  Act  and  expressing 
loyalty  to  the  Federal  Reserve  System,  protest  against  the  provisions  of  the 
Act  relating  to  the  collection  of  checks,  and  instructs  the  Committee  on 
Federal  Legislation  of  the  American  Bankers'  Association  to  endeavor  to 
secure  amendments  to  the  Federal  Reserve  Act,  providing  for  the  establish- 
hment  of  a  collection  system  which  is  fair  and  equitable  to  all  Banks  and 
to  the  general  public. 

"Be  it  Further  Resolved,  That  the  President  of  the  American  Bankers' 
Association  be  authorized  and  directed  to  appoint  a  Committee  of  twenty- 
five  bankers,  fifteen  of  whom  shall  be  country  bankers,  and  ten  of  whom 
shall  be  reserve  city  bankers,  and  that  this  Committee  co-operate  with  the 
Committee  on  Federal  Legislation  of  the  American  Bankers'  Association  in 
bringing  about  the  enactment  of  the  desired  amendment." 

The  majority  of  the  Committee  of  Twenty-Five,  as  this 
body  has  come  to  be  known,  is  composed  of  country  bankers, 
who  obviously  have  a  special  cause  to  plead.  The  framers  of 
the  resolution  were  evidently  taking  no  chances  with  the  nature 
of  the  Committee  which  the  President  of  the  Association,  him- 
self a  banker,  might  appoint.  The  first  meeting  of  the  Committee 
of  Twenty-Five  was  held  in  December,  1916.  According  to  the 
report  of  the  meeting,  as  prepared  by  Mr.  Jerome  Thralls,  its 
Secretary : 


"the  Committee,  after  mature  deliberation  unanimously  concluded,  that 
its  plain  duty  at  this  juncture  is  to  seek  an  amendment  to  the  law  which 
will  accord  to  banks  the  rights  that  are  guaranteed  by  the  Constitution  of  the 
United  States  to  every  citizen,  (individual,  firm  and  corporation)  that  is, 
the  right  to  demand  and  receive  fair  compensation  for  services  rendered 
entailing  labor,  risk  and  expense;  and  to  undertake  to  bring  about  such 
modifications  and  changes  in  the  Federal  reserve  clearing  and  collection 
system  as  are  necessary  to  put  it  upon  a  basis  where  its  development  and 
extension  will  depend  entirely  upon  merit.    It  was  the  consensus  of  opinion 


62  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

that  the  Federal  reserve  clearing  and  collection  system,  like  any  private 
business  of  similar  character,  will  succeed  and  endure  only  because  of  its 
ability  to  render  the  most  efficient  service  upon  the  most  economical  lines, 
and  that  so  far  as  possible,  all  features  of  compulsion  and  coercion  should 
be  removed.  It  was  further  expressed  as  the  sense  of  the  meeting  that 
the  country  clearinghouses  being  operated  in  eleven  of  the  leading  centers 
of  this  country  are  most  valuable  and  efficient  collection  agencies,  and  that 
such  organizations  should  be  established  and  maintained  in  all  of  the 
larger  cities  and  that  some  plan  should  be  evolved  whereby  they  might  be 
united  in  a  national  association  through  which  cash  items  could  be  collected 
or  cleared  on  every  section  of  the  United  States.  .  .  It  is  not  only  the 
desire  of  every  banker  that  the  most  modern,  efficient,  and  economical 
methods  for  handling  cash  items  be  evolved  and  developed,  but  it  is  the 
duty  of  every  banker  to  use  his  best  efforts  to  that  end,  and  to  give  the 
business  public  the  benefits  of  such  savings  as  may  be  effected  through 
improved  methods." 

The  prepared  report  of  the  deliberations  further  stated: 

"The  Committee  has  to  deal  with  the  problem  of  evolving  the  most  efficient 
and  economic  means  of  handling  annually  over  723,763,570  so-called  country 
checks,  aggregating  more  than  $30,000,000,000,  and  on  which  an  exchange 
charge  of  66  2-3  cents  per  thousand  dollars,  or  an  annual  amount  of  $20,000,000, 
was  assessed  prior  to  July  15,  1916,  and  on  which  there  was  an  expense  in  the 
handling  (generally  known  as  administrative  cost)  of  33  1-3  cents  per  thousand 
dollars,  totalling  annually  $10,000,000. 

"The  handling  of  these  items  affects  the  relations  of,  and  the  business  of, 
7,618  member  banks  and  20,799  state  banks,  bankers  and  trust  companies, 
and  the  influence  of  changes  in  the  vital  principles  relating  to  their  issue, 
payment  or  handling  permeates  every  line  of  business. " 

The  amendment  proposed  by  the  "Committee  of  Twenty- 
Five"  is  designed  to  strike  out  paragraph  13  of  section  16  of 
the  Act  and  to  reenact  it  with  the  addition  of  the  following 
clause: 

"Nothing  herein  contained  shall  be  construed  as  prohibiting  a  member 
bank  from  making  reasonable  charges  against  the  presenter,  in  no  case  to 
exceed  10  cents  per  hundred  dollars  or  fraction  thereof,  based  on  the  total 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  63 

of  checks  and  drafts  presented  at  any  one  time,  for  collections  or  payments  of 
checks  and  drafts  drawn  upon  it  and  remission  therefor  by  exchange  or  other- 
wise, or  for  exchange  sold  to  its  patrons.  The  Federal  Reserve  Board  shall, 
by  rule,  fix  the  charge  which  may  be  imposed  for  the  service  of  clearing  or 
collection  rendered  by  the  Federal  Reserve  bank." 

It  will  be  observed  that  the  Committee's  amendment 
restricted  the  power  of  the  Federal  Reserve  Board  to  fix 
and  determine  exchange  charges  to  the  charges  made  by  the 
Federal  reserve  banks.  It  authorizes  every  bank  to  make  a  charge 
of  ten  cents  for  every  $100  or  fraction  thereof,  irrespective  of 
whether  this  charge  is  a  reasonable  charge  for  the  cost  of  the 
service  rendered  by  the  institution. 

The  House  of  Representatives,  before  the  close  of  the  session 
of  Congress  terminating  March  4, 1917,  voted  down  the  so-called 
Kitchen  amendment,  designed  to  accomplish  the  same  effect  as 
that  proposed  by  the  Committee  of  Twenty-Five.  Bills  to 
achieve  the  same  end  were  introduced  by  Representatives  Kitchen 
and  McFadden  in  the  House  of  Representatives  shortly  after 
the  beginning  of  the  "War  Session"  in  April,  1917.  Senator 
Gronna  introduced  in  the  Senate  the  amendment,  proposed  by 
the  Committee  of  Twenty-Five,  permitting  an  exchange 
charge,  not  exceeding  ten  cents  per  $100  or  fraction  thereof. 
The  Chairman  of  the  Senate  Committee  on  Banking  and  Cur- 
rency referred  the  Gronna  amendment  to  the  Federal  Reserve 
Board,  with  the  request  that  the  opinion  of  the  Board  con- 
cerning the  advisability  of  its  enactment  be  communicated  to 
him.      Governor  Harding  in  his  reply  stated  that 

"After  a  full  discussion  of  the  matter  the  board  directed  me  to  say  to  you 
that  it  would  regard  the  adoption  of  the  amendment  as  most  unfortunate. 
It  believes  firmly  that  it  is  the  duty  of  every  bank  to  pay  without  deduction 
or  discount,  at  its  own  counter,  checks  drawn  by  its  depositors  against  their 
balances.  No  bank  questions  this  obligation  on  its  part  when  cash  payments 
are  demanded  by  the  presenter  of  the  check,  and  about  one-half  of  all  banking 
institutions  in  the  country  are  now  remitting  without  deduction  for  checks 
on  themselves  forwarded  by  the  Federal  Reserve  banks.  The  board  realizes 
that  the  operation  of  the  Federal  Reserve  check  clearing  system  has  in  a  number 
of  cases  deprived  banks  of  an  income  from  exchange  on  checks  which  they 
have  hitherto  enjoyed,  but  as  they  are  enabled  to  offset  checks  drawn  upon 


64  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

themselves  sent  them  by  the  Federal  Reserve  banks  with  checks  drawn  upon 
other  banks  and  are  permitted,  furthermore,  to  cover  by  shipments  of  currency 
at  the  expense  of  the  Federal  Reserve  Bank,  no  actual  hardship  is  imposed. 
An  amendment  permitting  a  charge  of  not  exceeding  10  cents  per  $100  or 
fraction  thereof,  based  on  the  total  of  checks  and  drafts  presented  at  any 
one  time  for  collection  and  payment  of  checks  and  remissions  therefor  by 
exchange  or  otherwise,  would,  in  the  opinion  of  the  board,  be  construed  by 
the  banks  as  a  definite  suggestion  that  they  impose  such  a  charge,  with  the 
result  that  eventually  these  charges  would  be  generally  made,  not  only  as 
against  checks  coming  in  from  a  distance,  but  even  against  checks  presented 
by  payees  residing  in  the  community  where  the  bank  is  located.  While 
banks  would  no  doubt  pay  checks  for  their  own  depositors  without  any  charge, 
it  is  entirely  possible  that  many  of  them  would  avail  themselves  of  the  oppor- 
tunity of  enforcing  this  charge  against  checks  presented  by  payees  who  are 
not  depositors.  This  would  impose  a  hardship  upon  those  of  the  poorer  classes 
who  are  not  bank  depositors. 

"The  board  would  call  attention  also  to  the  fact  that  for  some  years  past 
actual  payees  of  checks  drawn  upon  country  banks  have  been  able  in  many 
cases  to  collect  them  without  exchange  charges,  which  have  been  absorbed 
by  their  depository  banks,  which  have  in  turn  been  reimbursed  by  balances 
kept  with  them  by  the  country  banks.  Immediately  upon  the  passage  of 
Senate  Bill  No.  8,  or  no  later  in  any  event  than  November  17  next,  no  bank 
balances  will  count  as  reserve  except  those  with  Federal  Reserve  banks,  so 
that  facilities  for  free  collection  will  no  longer  be  afforded  by  member  banks, 
and  the  result  would  be  that  many  individuals,  firms,  and  corporations  would 
be  paying  exchange  charges  of  one-tenth  of  1  per  cent  upon  checks  which  they 
have  hitherto  been  able  to  collect  at  par. 

**The  enactment  of  the  proposed  amendment,  in  the  opinion  of  the  board, 
would,  because  of  the  injury  it  would  work  to  holders  of  bank  checks,  create 
a  strong  protest  all  over  the  country,  which  would  be  far  stronger  than  the 
pressure  that  is  now  being  brought  to  bear  for  its  enactment." 

Governor  Harding  enclosed  with  his  reply  a  resolution  adopted 
by  the  Governors  of  the  Federal  reserve  banks  at  their  Tenth 
Conference,  in  which  they  "earnestly  urged  the  Federal  Reserve 
Board  to  use  every  legitimate  means  possible  to  prevent  the 
enactment  of  the  Kitchen  Bill  when  introduced  into  Congress, 
and  to  promptly  develop  and  put  in  the  fullest  operation  the 
Federal  reserve  collection  system." 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  65 

Reserve  Banks  Plan  to  Have  Par  Collection  Universal. — ^While 
the  state  bankers  have  been  exerting  every  influence  at  their 
command  to  perpetuate  exchange  charges,  the  Federal  Reserve 
Board  and  the  reserve  banks  have  been  working  steadily  toward 
the  extension  of  par  check  collections,  looking  forward  to  the 
time  when  every  check  will  pass  at  par  throughout  the  country. 
The  first  step  toward  a  universal  par  list  was  taken  by  the  Boston 
Reserve  Bank,  which  as  has  been  said,  took  over  the  Boston 
Clearing  House.  With  97  per  cent  of  the  aggregate  amount  of 
checks  already  passing  at  par,  it  was  not  difficult  to  inaugurate  a 
system  by  which  all  checks  would  be  received  at  par,  the  reserve 
bank  collecting  the  samll  percentage  drawn  on  non-assenting 
banks  through  express  companies  or  neighboring  banks.  The 
Reserve  Bank  of  San  Francisco,  with  the  inauguration  of  the 
compulsory  collection  system,  announced  that  it  would  accept 
and  collect  checks  at  par  on  any  bank  in  the  district  whether 
it  had  assented  to  the  plan  or  not.  Perhaps  the  most  significant 
step,  however,  is  that  taken  by  the  New  York  Reserve  Bank, 
which  announced  that  on  and  after  April  1,  1917,  it  would  receive 
for  collection  at  par  checks  on  all  banks  and  trust  companies 
within  its  district.  At  that  time  some  935  banks,  out  of  a  total 
of  1049  banks  of  all  classes  within  the  district,  were  remitting  at 
par.  The  reserve  bank  declared,  that  justice  to  the  great  majority 
of  banks  demanded  that  the  114  recalcitrants  should  be  forced 
to  honor  their  checks  at  par,  and  that  the  Federal  Reserve  Bank 
would  arrange  to  collect  checks  upon  the  non-assenting  banks 
by  having  them  presented  by  an  express  company  for  payment 
at  the  counters  of  these  institutions.  There  could  be  no 
objection,  the  Reserve  Bank  pointed  out,  to  be  required  to 
cash  checks  drawn  by  their  depositors,  regularly  endorsed  and 
presented  by  responsible  persons  at  the  paying  teller's  window. 
It  was  a  legal  and  moral  obligation  which  the  bank  must  meet. 
Although  the  plan  would  involve  considerable  expense,  in 
proportion  to  the  items  which  had  to  be  collected  in  this  manner, 
yet  on  the  whole  the  advantage  to  the  16,000  banks  which  were 
using  the  reserve  collection  system  would  far  outweigh  the 
added  cost. 

The  country  bankers  of  New  York  State  were  not  slow  in 


66  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

accepting  the  challenge  of  the  reserve  bank.  Some  weeks  after 
the  inauguration  of  the  plan,  the  Federal  Reserve  Bank  of  New 
York  received  for  collection  a  few  checks  on  non-assenting  banks, 
which  checks  had  stamped  thereon  the  words  "not  payable 
through  an  express  company."  As  the  New  York  Federal 
Reserve  Bank  declared 

.  .  .  this  stamp  is  being  used  by  some  of  them  in  the  expectation  that 
they  may  be  enabled  thereby  to  pay  checks  drawn  upon  themselves  at  less 
than  their  face  value  to  the  detriment  of  business  men  and  others  who 
received  such  checks.  ...  Of  the  total  banks  in  the  New  York  Federal 
reserve  district  99.6  per  cent,  using  figures  on  the  basis  of  their  resources, 
are  paying  checks  drawn  on  them  at  their  face  value.  The  collection  system 
of  the  bank  is,  therefore,  so  clearly  complete  that  it  will  be  carried  to  com- 
pletion with  the  least  possible  delay.  In  order  to  accomplish  this  result, 
and  thereby  give  to  the  customers  of  all  banks  whether  or  not  they  are 
members  of  the  Federal  reserve  system,  the  benefits  of  a  direct,  economical 
and  scientific  method  of  collecting  checks,  special  agencies  will  be  promptly 
established  wherever  necessary  to  handle  all  checks  carrying  the  restrictive 
stamps." 

Not  to  be  outdone,  the  bankers  induced  the  Legislature  of 
New  York  to  pass  a  bill,  intended  to  protect  the  right  of  state 
banks  to  collect  exchange  charges  on  their  checks  when  remitted 
for  collection.  The  bill,  which  is  now  in  the  hands  of  the  Gov- 
ernor, makes  it  a  crime,  punishable  with  a  $1,000  fine,  to  compel 
a  banking  institution  of  the  state  to  surrender  its  right  to  make 
a  reasonable  charge  for  domestic  exchange,  or  to  pay  checks 
drawn  on  it  by  any  other  means  than  cash  in  its  own  office. 
The  presenting  of  checks  at  the  offices  of  the  drawee  bank 
through  express  companies  "or  otherwise,"  would  constitute  a 
crime.  This  grotesque  bill  will  probably  not  receive  the  signa- 
ture of  the  Governor,  but  if  he  should  sign  it,  there  is  no  doubt, 
in  the  minds  of  Federal  reserve  officials,  that  it  will  be  promptly 
declared  unconstitutional  by  the  Federal  Courts  as  an  unlawful 
restriction  of  interstate  commerce.  A  test  case  will  doubtless 
be  instituted  concerning  a  check  forwarded  for  collection  to  the 
New  York   Federal   Reserve   Bank  from  some  other   Federal 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  67 

reserve  district,  and  drawn  upon  one  of  the  objecting  New  York 
State  banks.  In  view  of  the  very  broad  interpretation  which 
the  Supreme  Court  consistently  has  given  to  the  interstate 
commerce  clause,  it  is  very  unlikely  that  such  a  statute  will 
stand  the  test  of  the  Supreme  Court's  scrutiny.  The  only  doubt 
concerns  the  power  of  the  express  companies  under  their  char- 
ters to  engage  in  such  an  activity.  Although  the  express  com- 
panies have  engaged  in  the  banking  business  to  the  extent  of 
selling  money  orders,  it  might  be  held  that  their  corporate 
powers  did  not  extend  to  the  collection  of  checks.  The  Federal 
Reserve  Bank  of  New  York  was  evidently  anticipating  such  a 
condition  when  it  announced  that  it  would  estabHsh  "special 
agencies  "  wherever  necessary  to  make  such  collections.  Whether 
the  Federal  reserve  bank  intends  to  use  other  banking  institu- 
tions or  entrust  the  work  to  responsible  local  citizens  is  not  clear. 
Either  plan  would  defeat  the  objections  of  the  state  bankers. 

From  the  standpoint  of  power  there  is  no  doubt  that  the 
Federal  Reserve  Board  has  a  tremendous  advantage  in  forcing 
the  state  banks  to  honor  their  own  checks.  The  most  efficient 
collection  medium  is  probably  the  post-office,  which  being  a 
Federal  institution  would  lie  beyond  the  power  of  a  State  Court's 
injunction.  As  a  matter  of  fact  on  July  20,  1916,  the  Secretary 
of  the  Treasury  announced,  at  the  request  of  the  Federal  Reserve 
Board  and  with  his  recommendation,  that  the  Post  Master 
General  had  issued  instructions  to  post  masters  in  towns  and 
cities  having  no  member  bank,  to  accept  from  the  Federal 
reserve  bank,  and  to  present  and  collect  checks  drawn  upon  non- 
member  banks,  which  had  refused  to  remit  at  par.  The  post 
masters  were  authorized  to  receive  checks  from  the  Federal 
reserve  bank,  present  them  at  the  counters  of  the  state  banks, 
collect  the  currency,  and  remit  the  proceeds  to  the  Federal 
reserve  bank  of  the  district  involved,  at  the  expense  of  that 
institution.  However,  the  new  plan  was  never  put  into  opera- 
tion for  on  July  28th  the  Post  Master  General  suspended  his 
order  until  further  notice.  In  announcing  the  suspension  the 
Post  Master  General  stated  that  it  was  made  at  the  instance  of 
the  Federal  Reserve  Board,  which  desired  further  time  in  which 
to  perfect  details  of  the  check  collection  plan  before  enlisting 


68  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

the  co-operation  of  the  Post  Office  Department.  No  further 
action  has  been  taken  concerning  the  use  of  the  Post  Office  in 
the  collection  of  checks. 

Analysis  of  State  Bank  Protests. — ^The  protest  of  the  state 
banks  is  based  upon  two  grounds:  first,  that  the  elimination  of 
exchange  charges  works  a  heavy  decrease  in  their  profits,  render- 
ing many  state  institutions  unprofitable  to  their  owners;  and, 
second,  that  it  is  unfair  and  unreasonable  and  cannot  be  defended 
as  a  matter  of  principle. 

No  authoritative  figures  have  been  produced  substantiating 
the  allegations  that  the  elimination  of  exchange  charges  will 
work  ruin  to  the  state  banks.  The  results  of  an  inquiry  made  by 
the  President  of  the  Ohio  Bankers'  Association  of  the  country 
banks  in  that  state  are  interesting,  however,  as  throwing  light 
upon  the  extent  of  the  effect  of  the  new  system  upon  the  profits 
of  the  country  banks.  President  Sams  in  his  annual  address 
before  the  Association,  delivered  in  September  1916,  stated  the 
results  of  his  inquiry  as  follows:  "We  received  prompt  and  very 
full  replies  and  in  many  instances  comments  upon  the  subject 
of  the  inquiry  all  of  which  tended  to  show  this  to  be  one  of  the 
minor  items  of  profits  of  the  Ohio  banks.  The  average  profit 
of  the  banks  reporting  was  a  little  over  $15  for  the  month  of 
May  1916." 

The  argument  that  exchange  charges  are  necessary  to  support 
the  small  country  bank  is  not  borne  out  by  the  experience  in 
New  England.  Exchange  charges  on  country  checks  have  been 
practically  unknown  in  New  England  for  years  under  the  very 
remarkable  system  developed  by  the  country  collection  depart- 
ment of  the  Boston  Clearing  House.  Over  97  per  cent  of  the 
aggregate  amount  of  all  checks  sent  out  for  collection  were 
remitted  for  at  par.  If  the  absence  of  exchange  charges  was 
destructive  to  the  country  bank,  the  results  should  be  evident  in 
New  England.  An  examination  of  the  sworn  statements  of 
earnings  and  expenses  of  the  New  England  banks,  as  published 
by  the  Comptroller  of  the  Currency,  shows  these  institutions  to 
be  as  profitable  on  the  whole  as  those  of  any  section  of  the 
country.  Certainly  the  data  thus  far  presented  does  not  estab- 
lish the  fact  that  the  abolition  of  such  charges  will  ruin  the 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  69 

country  banks.  Even  though  it  be  granted  for  the  sake  of 
argument,  that  the  revenue  heretofore  derived  from  exchange 
charges  is  necessary  for  the  support  of  many  country  banks,  it 
does  not  follow  that  the  present  system  of  charging  exchange 
should  be  perpetuated. 

The  second  ground  upon  which  the  country  banks  attempt  to 
justify  exchange  charges  has  been  well  stated  by  Mr.  W.  J. 
Gray,  Vice-President  of  the  First  and  Old  National  Bank  of 
Detroit: 

"Those  who  favor  the  plan  for  eliminating  this  charge,  the  so-called 
exchange,  overlook,  I  think,  the  fact  that  the  bank  does  something  more  than 
merely  paying  a  check  over  the  counter.  With  the  remittance,  the  bank  is 
obliged  to  write  a  letter  (or  make  out  a  credit  ticket  of  some  kind),  affix  a 
postage  stamp,  draw  a  draft  on  an  acceptable  point  (or  else  place  a  credit  on 
its  books),  all  of  which  things  would  be  unnecessary  if  the  check  were  simply 
paid.  It  is  quite  evident  then  that  the  bank  has  done  something  beyond  the 
ordinary.  For  this,  ought  not  the  bank  to  be  paid,  and  ought  it  not  be  paid 
something  by  way  of  profit,  beyond  the  mere  cost  of  the  service,  that  is  the 
outlay  for  stamps,  stationery,  and  clerical  hire? 

"I  think  I  understand  the  meaning  of  the  term  'exchange.'  I  define  it, 
in  homely  phrase,  as  the  price  of  money  payable  at  a  distant  point.  To  buy 
exchange  on  New  York  is  to  buy  a  draft  payable  in  New  York.  Under  its 
machinery,  a  merchant  in  Portland  who  owes  a  debt  payable  in  New  York 
can  at  his  own  bank  buy  a  piece  of  paper  which  will  be  good  in  New  York 
for  the  amount  of  his  debt.  The  primeval  method  of  payment  would  be  for 
him  to  ship  the  currency  to  New  York.  In  such  event,  he  would  have  to  pay 
the  shipping,  insurance  and  other  charges,  but  his  expense  will  be  much  less 
if  he  buys  a  banker's  draft.  Theoretically,  of  course,  the  banker  would  be 
obliged  to  ship  the  currency  to  his  New  York  correspondent  to  put  him  in 
funds  with  which  to  meet  the  draft.  But  as  there  would  probably  be  some 
one  in  New  York  who  wished  to  pay  a  debt  in  Portland,  if  the  two  debts  were 
in  the  same  amount,  it  would  be  unnecessary  to  ship  any  currency  either  way. 
At  all  events,  it  would  only  be  necessary  to  ship  the  excess  of  the  one  debt  over 
the  other.  The  same  reasoning  applies  to  a  series  of  transactions,  only  the 
net  balance  owing  needs  any  remittance  in  currency. 

"As  the  banker  thus  is  not  required  to  ship  currency  for  each  transaction, 
his  charge  for  the  service,  or  'exchange',  need  not  be  the  same  amount  as  if  he 
had  actually  to  ship  currency  each  time.  Consequently  the  merchant  in  buying 
exchange  need  not  pay  the  cost  of  shipping  the  entire  amount,  usually  a  small 
fraction,  regulated  in  foreign  exchange  by  demand  and  supply,  and  in  domestic 
exchange  apparently  regulated  by  nothing.  *** 


70  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

"My  personal  view  tends  to  the  idea  that  the  banks  ought  to  get  something 
for  service  in  remittance,  but  that  the  charges  should  be  regulated  by  the 
Federal  Reserve  Board.  If  the  banks  are  doing  something  at  an  expense  of 
postage,  stationery  and  clerk  hire,  they  ought  not  to  be  expected  to  give  this 
to  the  public.  Indeed,  the  Federal  Reserve  Board  recognized  this  principle, 
for  the  cost  of  the  plan  is  assessed  against  the  banks,  and  not  against  the 
public  who  presumably  are  most  benefited." 

Mr.  Caldwell  Hardy,  Chairman  of  the  Board  of  Directors  of 
the  Federal  Reserve  Bank  of  Richmond,  in  an  address  before  the 
Richmond  Association  of  Credit  Men,  clearly  stated  the  weak- 
ness of  this  argument : 

"There  is  a  strong  justification  for  the  elimination  of  the  country  bank 
charge.  Many  of  them  complain  that  it  will  be  difficult  for  them  to  make 
dividends  if  they  lose  their  incomes  from  exchange  charges,  but  if  this  is  the 
case,  it  demonstrates  that  there  is  little  justification  for  their  existence.  If 
they  can  live  only  by  a  charge  made  on  their  customers*  checks,  given  to 
city  merchants  and  others,  they  are  levying  a  tax  indirectly  on  the  business 
of  their  communities  for  the  benefit  of  the  few  in  the  community  who  are 
stockholders  in  the  bank.  The  income  from  collection  charges  has  led  these 
banks  to  permit  local  merchants  to  run  their  bank  accounts  on  a  losing  basis 
to  the  bank,  the  loss  being  recouped  through  the  collection  charge  made  on  the 
checks  referred  to  above.  The  elimination  of  collection  charges  will  compel 
the  country  banks  to  require  their  customers  to  keep  their  accounts  on  a 
reasonably  remunerative  basis  to  the  banks,  the  banks  in  turn  giving  the 
customers  a  quid  pro  quo  in  the  way  of  loans  or  otherwise." 

He  went  on  to  point  out  that  many  large  business  concerns 
carried  balances  in  New  York,  Chicago  or  other  large  cities, 
because  drafts  drawn  on  banks  in  such  cities  passed  at  par  prac- 
tically throughout  the  country.  Under  the  Federal  Reserve 
System  this  practice  will  no  longer  be  necessary  in  order  to  make 
payment  by  a  credit  instrument  that  will  pass  at  par. 

"The  ready  availability,  through  this  draft  and  collection  system,  of  funds 
deposited  with  any  member  bank  will  be  a  strong  inducem,ent  to  large  business 
interests,  corporations  and  transportation  lines  to  keep  their  funds  more  on 
deposit  with  the  banks  in  their  district,  where  they  are  located  or  operating. 
This  will  bring  about  equalization  of  deposits  throughout  the  country,  and  be 


THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM  71 

of  great  benefit  to  many  districts  which  contribute  largely  to  the  support  of 
many  large  interests,  but  realize  in  many  instances  only  limited  advantages  in 
return." 

Mr.  Charles  S.  Hamlin,  former  Governor  of  the  Federal 
Reserve  Board,  in  an  address  before  the  Virginia  Bankers* 
Association,  strikingly  phrased  the  basic  argument  for  the  new 
collection  plan  when  he  said:  "To  oppose  a  national  system  of 
check  clearing  at  par,  is  no  more  justifiable  than  to  oppose  the 
construction  of  a  great  free  highway  because  a  few  owners  of 
toll  roads  benefit  by  their  continuance."  Akin  to  such  opposi- 
tion, he  said,  was  the  opposition  of  the  city  of  Erie,  Pa.,  many 
years  ago,  to  the  transformation  of  the  narrow-gauge  Eastern 
Railroad  into  a  standard-gauge  road,  thus  making  possible 
physical  connection  with  the  standard-gauge  roads  leading  to 
the  West,  whose  terminals  were  located  in  another  section  of  the 
city.  The  joining  of  the  two  systems  on  a  single  standard-gauge 
the  City  of  Erie  feared,  would  do  untold  damage  by  destroying 
the  town's  flourishing  transshipment  industry.  "The  new 
check-collecting  system,"  he  declared,  "is  merely  an  attempt  to 
fix  a  standard-gauge  along  which  the  country's  vast  volume  of 
checks  may  travel.  The  sooner  banks  adopt  this  system,  the 
sooner  the  whole  banking  world  will  benefit." 

It  must  be  clearly  understood  that  the  Federal  Reserve  Board 
and  the  officials  of  the  Federal  Reserve  Banks,  in  urging  and 
insisting  upon  par  collections,  do  not  advocate  that  a  member 
bank  carry  any  account  which  is  unprofitable  after  exchange 
charges  are  eliminated.  On  the  contrary  they  have  consistently 
taken  the  position  that  a  depositor  should  be  required  to  adjust 
his  account  upon  a  basis  which  renders  it  moderately  profitable 
to  his  bank.  If  a  country  merchant  carries  an  account  which 
would  be  unprofitable,  except  for  the  fact  that  the  bank  can 
charge  exchange  for  honoring  the  checks  which  this  merchant 
sends  to  his  jobber  or  wholesaler  in  a  distant  city,  the  cost  of 
carrying  the  account  is  paid  not  by  the  depositor  but  by  his 
distant  creditor.  No  wholesale  establishment  charges  higher 
prices  to  country  merchants  located  in  places  where  exchange 
charges  are  heavy  solely  because  of  the  exchange  charges  which 


72  THE  FEDERAL  RESERVE  CHECK  COLLECTION  SYSTEM 

must  be  paid  in  collecting  the  checks  received  from  such  cus- 
tomer. Exchange  chcirges  are  like  postage;  they  constitute  a 
part  of  the  general  overhead  expenses  of  a  business,  which  are 
uniformly  levied  against  the  entire  enterprise.  The  mercant 
doing  business  in  a  community  where  no  exchange  is  charged 
is  contributing  his  share  to  pay  a  portion  of  the  wholesaler's 
expense  for  which  he  is  in  no  way  responsible. 

In  the  last  analysis,  the  customers  of  the  retail  merchant — 
the  people  at  large — are  paying  these  charges,  the  progressive 
community  equally  with  the  backward  community;  the  thickly 
populated  districts  alike  with  those  which  are  sparsely  settled. 
Such  a  practice  is  no  more  defensible  than  one  in  which  freight 
charges  were  ignored  and  goods  were  billed  for  the  same  price 
to  the  merchant  doing  business  around  the  corner  from  the 
wholesaler,  as  that  charged  to  the  storekeeper  thousands  of 
miles  away. 

If  any  portion  of  the  country  banks  find  that  certain  of  their 
accounts  are  unprofitable  when  exchange  charges  are  eliminated, 
let  them  collect  the  deficiencies  from  such  customers,  either  by 
requiring  larger  balances  or  by  making  a  charge  to  cover  any 
extraordinary  expenses  to  which  the  bank  is  put.  With  a  system 
of  competitive  banking — ^with  rival  banks  seeking  the  accounts 
of  local  business  men — competition  between  local  banks,  as  a 
rule,  can  be  depended  upon  to  protect  the  country  merchant 
against  extortionate  and  unreasonable  demands  and  charges 
by  his  bank. 

To  pass  a  law  giving  permission  to  all  banks  to  levy  exchange 
charges,  without  reference  to  whether  they  can  be  justified, 
would  put  an  end  to  the  entire  par  collection  system.  It  would 
be  a  step  backward  made  in  the  interests  of  a  few  banks  at  the 
expense  of  the  business  interests  of  the  entire  country. 


THIS  BOOK  I|^^^BI.OW  ^^^^ 

p;,Y  AND  TO  » •   r-n552^BEi^f^ 

OVERDUE-  I      tJOQ»e*=-'^^ 


^p  21-9  5W- 


U.C.BERKELEY  LIBRARIES 


CDH71iSS17E 


S28945 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


To 


IP 


^^iN-'t^ 


